Rising Rates Pose Greater Threat Than Initial Indications

While maintaining that tight credit conditions and rapid price gains present the greatest threats to the housing recovery, Capital Economics is ready to acknowledge that rising mortgage rates may provide more drag than the firm’s analysts first thought.

Tracking mortgage applications (as reported by the Mortgage Bankers Association) from May through September, Capital Economics determined that refinancing activity has taken the biggest hit from the 120-basis point climb in rates with a decline of 70 percent.

While the decrease in refinance activity isn’t necessarily reflective of changes in housing market demand, the 17 percent drop in purchase applications over the same period is another story.

“That was enough to undo all of the improvement in home purchase applications that previously appeared to be underway,” property economist Paul Diggle wrote in the company’s latest US Housing Market Focus. “This has put a dent in hopes that mortgage-dependent buyers are playing a bigger role in the housing recovery.”

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