The state of the housing market has been improving over the last year, due in part to historically low interest rates. There is a lot of concern that the housing recovery could begin to weaken once interest rates move higher, but recent data shows that isn't happening yet, despite a recent increase in rates.
It is easy to understand why rising rates would lead to concerns, but I believe the recovery is going to continue, even as rates inch higher. The housing market is largely dependent on what buyers can afford to pay in terms of monthly payments. Rising interest rates mean a larger portion of monthly payments will go toward interest, which means the difference will have to come from the actual sale price of homes. The rate of increase in home prices is likely to slow as rates rise, but buyers and sellers should still be able to reach deals to get houses sold.
Historically speaking, interest rates have been much higher than their current level, and even if we see rates climb closer to 5.5% or 6%, they would still be low on a historic basis.
A clear sign that rising rates will not have a material impact on home sales can be seen in last week's Mortgage Bankers Association Mortgage Applications Survey. While applications for refinance loans were lower, purchase applications were up 3% from the previous week, and total purchase loans were up 16% from the same period last year. This occurred during a week when interest rates rose more than any week since 2011.
Another clear indicator that the market remains robust can be seen in May pending home sales. During the month, contracts to purchase previously owned homes in the U.S. rose to their highest level in the last six years.
The figures came from the National Association of Realtors, which reported that its index rose by 6.7% during May, to 112.3, which is the highest it has been since December 2006.
With the momentum that the housing market currently has, it is going to take a lot more than a gradual rise in interest rates to turn things around. Yes, home prices may stop accelerating at the rate they have been over the last year or two, but sales will continue to remain strong.