After rising by 19 basis points during November, current mortgage rates are nearly a full percentage point higher than they were in early May. The question is: Have higher mortgage rates begun to take their toll on the housing and refinance markets? Indications are that despite some outward signs of strain, those markets are still quite healthy.
Housing prices march onward and upwardOn November 26, the latest S&P/Case-Shiller Home Price Indices revealed that home prices rose by 3.2 percent during the third quarter, and by 0.7 percent during September. On the surface, these figures seemed to represent a slowing down from the 7.1 percent growth rate for the second quarter, and the 1.3 percent growth rate for August. However, the real estate market is notoriously seasonal, and when seasonally adjusted figures are compared, it turns out that the second- and third-quarter growth rates are virtually identical, as are the August and September rates. The third quarter figure is especially telling, since this year's rise in mortgage rates essentially occurred in May and June. This means that significantly higher rates prevailed throughout the third quarter, but the housing market continued its recovery anyway.
Refinancing down -- but not outOf course, higher mortgage rates also mean higher refinance rates. Does this mean that the window for refinancing has closed? According to figures from the Mortgage Bankers Association, there has been some erosion of refinancing activity since refinance rates moved higher. From early May to late November, the refinance share of overall mortgage application activity declined from 76 percent to 64 percent. Still, the fact that nearly two-thirds of mortgage applications are still for refinances suggests that fairly strong demand has survived the rise in refinance rates. This may be partially because the continued rise in housing prices is still bringing loans out from under water. This creates refinancing opportunities for the first time for people who bought their properties near the peak of the housing boom, when mortgage rates were much higher than they are today.
Also, some refinancing activity will survive higher rates because there are reasons for refinancing, such as restructuring payments, other than simply lowering the interest rate.