Housing market unaffected by rising interest rates

Despite rising mortgage costs, housing prices continued to steeply increase in May shows the Case-Shiller home price index. It rose 12.2%, the largest annual increase since March 2006.

 

Despite the Federal Reserve’s announcement to reduce its bond-buying program, which caused a rise in longtime interest rates, the May data remained unaffected.

The May 2013 numbers, published on Tuesday, reflect the average prices throughout March, April and May. According to the Primary Mortgage Market Survey, the interest rates for 30-year fixed mortgages started to rise in mid-May.

 

Therefore, this months Case-Shiller index is mostly unaffected by the higher lending cost.

Since the Federal Reserve Board’s April announcement to taper off bond purchases, interest rates have increased by nearly one third. The massive purchase of securities has kept longtime interested rates historically low.

Rates for 30-year fixed rate mortgages have increased from 3.35% (May 2nd) to 4.31% (July 25th) in less than three months. Although higher rates mean extra costs for most homebuyers, lending remains historically cheap. “Despite the recent back-up, 30-year mortgage rates are still near generational lows and affordability is still very favorable,” said Lee.

Housing prices are still 24.4% below the peak rates in July 2006. Growing in the past months, the market will continue its upward trend. “There is still room for house prices to rise,” said Jennifer Lee, economist with BMO Financial Group.

Although space for housing price increases exists, the pace will slow down in the near future. The growing costs of longtime lending will make financing a house less affordable. It will dampen the demand. The increasing interest rates “could contribute to some deceleration in price gains in the months ahead but probably won’t derail the uptrend,” said economist Bill Jordan with Wrightson ICAP.

Additionally, the revitalizing construction industry will add more and more houses to the market. Watch out for a slowdown in home price increases in the upcoming months.

While the growth at this level is unsustainable, there is no immediate risk of another housing bubble. “I’m not terribly concerned about a new housing bubble as prices to disposable income, compared to longer-term averages, shows that housing is still undervalued in most regions,” said Lee.

From April to May – the newest data available – the price for single-family homes in 20 major American cities rose by 2.4%. Overall, the housing market continues to perform strong and is in full recovery mode.

The pent-up demand and low inventory contribute to the rise in home prices. “Still-strong demand for housing and tight inventories continue to lift house prices,” said Lee. After years in crisis mode many buyers are returning but the market is still not ready to meet their demand. Despite a recent pick-up, construction rates are still historically low.

The recovering economy and the improving job market (unemployment down from 7.6% to 7.4% in July) are firing up the demand for houses, resulting in rising prices.

Two cities stand out in the housing price index released by Standard and Poor. Dallas and Denver, two booming towns, are the first major metropolitan areas to reach their pre-crisis peak levels.