Housing market shakes off rising mortgage rates

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 upward

On 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 out

Of 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.

The big picture

The resiliency of housing prices and refinancing activity makes sense when you consider two big-picture realities. One is that mortgage rates have risen in large part because of renewed strength in the economy. That strength -- while still far from overwhelming -- is also likely to create new buying demand to mitigate the impact of higher mortgage rates.

The other big-picture reality is that current mortgage rates are still very low from an historical standpoint, even if they have risen somewhat sharply this year. That means housing is still relatively affordable to new buyers, and refinance rates are still attractive to some current mortgage holders. So for now, the housing market has largely withstood the impact of higher mortgage rates.