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How Will Mortgage Rates Affect the Housing Market?

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Driven by low mortgage interest rates, the housing market boomed in recent years.

Will mortgage interest rates rise again this year? That depends.

Will the housing market collapse? Well, no.

Last year turned out to be one of the best years for real estate and the housing market on record in large part due to mortgage interest rates. Sales of existing homes were 5.8 percent higher in 2004 than they were in 2003, according to the National Association of Realtors.

New home sales set a record in 2004 also, rising 8.2 percent above the 2003 sales level. David Lereah, chief economist for the NAR, predicted that 2005 would be the third best year ever for housing. This is obviously great news.

Current mortgage rates have helped fuel a strong housing market at a time when the economy has been trying to struggle through with recovery. Many people wonder what will happen when mortgage interest rates do rise. Will home prices, which have enjoyed years of generous appreciation, drop?

Rates have increased in recent months from the lows set in late spring and early summer. Even so, NAR predicts that the 30-year fixed-rate loan will average 6.7 percent in 2004. Though higher than the historic low interest rates of 2003, this is still very low by historical standards.

Many of us remember when anything under 10% was fantastic! The early '80s were a market of mortgage rates of about 20%!!

No one knows for sure when mortgage interest rates will rise to a level that will affect affordability and the strength of the housing market. However, it's expected that inflation will remain low for some time.

NAR predicts that consumer price inflation will actually drop to 1.6 percent this year from a projected 2.4 percent last year. As long as inflation remains low, it's expected that the Federal Reserve will keep short-term interest low to keep from jeopardizing the economic recovery.

Housing will continue to be strong, according to the Oct. 3, 2003, issue of The Kiplinger Newsletter. Kiplinger sees mortgage interest rates rising to 7 percent by December 2004.

However, an increase in interest rates is not expected to put a dent in housing demand until they reach 8 percent. Kiplinger doesn't see a housing price bubble that's about to pop, as some naysayers have predicted.

According to Kiplinger, a few housing markets are ripe for correction, including Boston, Chicago, Houston and Charlotte, N.C. In these areas, home building and price gains are outpacing job and income growth.

Nationally, homes sales are expected to drop 5 percent this year, but home prices will appreciate 4 percent. Kiplinger is generally bullish on housing, which "will remain an important foundation of personal wealth."

Home ownership has always been one of the greatest things an individual or family could do for themselves financially. As the stock market has had it's violent ups and downs, as the economy faced uncertainty and fluctuation, real estate has consistently proven to be a winner over the long haul.

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