Rates would have to rise to almost 7% before a home at the U.S. median price would be unaffordable to a family making the median income in most parts of the country, according to a Freddie Mac study this month.
“While rising interest rates will reduce housing demand, rates would have to increase considerably more before the reduction in demand for home purchases would be substantial across the country,” Chief Economist Frank Nothaft wrote.
The increase “will not meaningfully impact the fundamental recovery in demand because affordability remains high relative to history,” Joseph Lavorgna, chief U.S. economist at Deutsche Bank Securities Inc., wrote yesterday in a note to clients. “Rates are also rising partly because of expectations of an improving economy. Hence, rising job and income prospects will offset some of the now-higher mortgage financing costs.”
Banks may also help offset the rate increase by loosening underwriting standards as rising prices reduce the risk of making new loans and a slowdown in refinancing makes lending to homebuyers more attractive. An index released this week by the Mortgage Bankers Association shows credit availability has eased since last year.
The bankers group’s index of home-loan purchase applications increased 2.1% in the week ended June 21, while its refinancing measure fell 5.2% to the lowest level since November 2011. The share of applicants seeking to refinance was 67.3%, the lowest since July 2011, the Washington-based trade association reported yesterday.
Higher rates are a sign that the economy is becoming healthier, Stuart Miller, chief executive officer of Miami-based Lennar Corp., the third-largest homebuilder, said on a conference call this week.
“Interest rates are moving higher in the context of economic improvement,” Miller said. “We’re looking at a supply shortage, so that means that even in the context of rising rates and a better economy, we’re likely to see price increases and rental increases.”