Why Surging Mortgage Rates Won't End The US Housing Recovery

The average 30-year fixed mortgage rate stood at 4.29% during the week of July 3 according to Freddie Mac. This is down from 4.46% the previous week, but remains sharply higher than the 3.35% during the week of May 2.

There are increasing concerns that higher mortgage rates will hurt the housing recovery, which has been a force at the forefront of the U.S. economic recovery.

In a new report, Morgan Stanley’s Vishwanath Tirupattur finds that despite rising interest rates, mortgages are still affordable¬† and under their long-term average. They also found that the per cent of cash buyers has doubled and they tend to be less affected by higher mortgage rates.

“While higher rates historically have coincided with improving prospects for growth and employment, and thus are positively correlated with house prices, historical relationships, of course, do not have to hold up.

“However, we think higher rates to date have had only second derivative effects. Thus, while we remain constructive on US home prices, we expect YTD home price gains to moderate, both due to higher rates and to recent increases in the visible supply of homes on the market, which is already reflected in our base-case projections: up 6-8% for 2013, up 4-6% for 2014 and 3-5% for 2015.”

Here are the three slides that show the impact of higher rates on the housing recovery in 3 slides:

mortgage rate slide
mortgage rate slide
mortgage rate slide

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