Will the spike in mortgage rates affect housing recovery?

Have you been watching mortgage rates rise the past few months and wondering what that means for the housing market?

To home buyers calculating the mortgage payment on their dream home, the effects are obvious: the increase in the 30-year fixed rate from 3.59% in early May to 4.73% at the end of August (according to the Mortgage Bankers’ Association, or MBA) means a 15% increase in the monthly payment on a $200,000 mortgage.

Logic would dictate the spike in interest rates would cause loan applications to slow down, which would depress home sales and prices.

Historically that hasn’t been the case. But this year isn’t the only time when mortgage rates have jumped up: they also climbed at least .4 points in seven other months since 1999.

Thanks to the folks at Trulia for providing this in-depth analysis. You can read their complete report here.

• The month when rates spike: Refinancing applications typically fall by 45% in the month of a spike, with further falls one and two months after mortgage rates jump, compounding the effect. The drop in refinancing applications this year was roughly 50% cumulatively over two months, which actually looks small compared with similar rate jumps in the recent past.

• 1-2 months after the spike: Pending home sales and home-purchase mortgage applications typically decline slightly, though the effect isn’t statistically significant. New home sales also decline modestly.

• 3 months after a spike: New home sales and existing home sales drop. That means that the May mortgage rate spike should show up most strongly in August new home sales and existing home sales, both of which will be reported later this month (on September 25 and September 19, respectively).

What’s the longer term outlook?

Since 1999, mortgage purchase applications and all measures of sales activity – NAR pending home sales, NAR existing home sales, and Census new home sales – have actually been higher when mortgage rates were higher.

Regardless of the trend in interest rates, there is still opportunity in the market. The key for us will be to find it.

Of course I could be wrong