Jul 18, 2013
Fannie Mae analyst on the effect of higher mortgage rates (and why he may be wrong)
18 Jul 2013
Posted by Andrew Kantor
Sometimes history can be a guide, sometimes not. Take an commentary by Mark Palim, vice president for applied economic and housing research at Fannie Mae, "The Impact of Rising Mortgage Rates on the Housing Recovery."
That impact, according to Palim, has been fairly mild. Historically, rapid interest-rate increases (like those we’ve seen recently)…
- will not stop the housing recovery;
- have little effect on home prices;
- tend to reduce sales volume;
- increase the market share of adjustable-rate mortgages (ARMs).
He based this conclusion on two examples of interest-rate jumps similar to what we’ve been seeing: October 1993 to December 1994 (when rates jumped from 6.83% to 9.20%) and October 1998 to May 2000 (when they went from 6.71% to 8.51%).
Here’s the problem. You can’t draw conclusions from those two examples and apply them to today.
There are simply too many other factors at play today — there are too many other butterflies flapping their wings. Off the top of my head:
- Interest rates a much lower today (so even when they jump, they’re still incredibly low).
- Investor purchases have been a huge portion of the market.
- Distressed properties — foreclosures and short sales — also hold a larger market share than usual.
Look at Palim’s last point — an increase in ARMs. That’s not going to happen today. For one, regulations are different (a point Palim himself concedes), but also because people get ARMs when they think rates are likely to go down. At 4.5% (Virginia’s typical 30-year-fixed rate today), that’s not likely to happen.
Further, Palim included this chart to illustrate that a jump in interest rates leads to a jump in ARM market share (circled):
That looks like cherry picking to me. He completely ignored the even larger jump in ARMs — from 2003 to 2007 — which happened when mortgage rates were relatively flat, as well as the jump in interest rates from 2001 to 2002, when ARM popularity fell.
The bottom line: There have been other times when interest rates increased, but — with apologies to Mr. Palim — you really can’t use them to predict today’s and tomorrow’s market.