Will higher rates slow the housing recovery?

Date posted: November 22, 2013

Mortgage rates have risen noticeably in the last year, and that makes it more expensive for people to buy homes. So will housing sales start to slip again under the weight of higher borrowing costs? N.C. State University economist Mike Walden responds.

“I recently gave a talk to homebuilders in the North Carolina area, and this was a big concern of theirs. They have, number one, seen their market improve — more sales, more building, et cetera. But they have also noticed that mortgage interest rates have gone up — in fact, by a full percentage point over the last year. So they asked me, ‘Hey, is this going to kill all of the housing recovery?’

And I’m going to give you the same answer I gave them: Number one, buying a house is actually a very complex decision-making process, because a house serves, number one, as a place for you to live and enjoy those housing services, as economists like to call it. But it’s also an investment. Most people (who) buy homes want to see that value go up over time. They sell the house down the road; they make some money.

“It’s really the investment part that’s been missing in the last five years, as housing values have gone down. But now that housing values and housing prices are going up, that is coming back. And what I told the home builders, as long as that continues I think many buyers will say, “Yes, I know I’m paying a little bit more for the interest rate, a little bit more to borrow money to buy that house, but, look, I’m going to get it all back and more because that house value is expected to go up over time.’

“I think that’s the kind of decision-making catalyst that homebuyers increasingly will be making in the future.”

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