For six of the last seven weeks, the 30-year mortgage rate has risen. The current rate is 4.86%, according to statistics from the Federal Home Mortgage Corporation. In the second week of November, the 30-year rate was at a record low 4.17% [.xls]. Despite this gradual rise, economists argue a higher rate may actually encourage market activity, rather than deter it.
Even though low interest rates tend to encourage investments at face value, many argue that consumers may not invest when rates are falling, due to the possibility of the rate becoming even lower and more favorable for investments. Though, when interest rates gradually rise, consumers are less reluctant to hold off because they want to take advantage of the rate before it goes even higher. As a result, a slow and steady rise in interest rates favors the housing market, according to the Chief Economist of the National Association of Realtors.
With record low home sales, the housing market will take any favoritism it can get. There were only 23,000 new homes sold in November [.pdf], which are the second fewest number of new homes sold in a month since record keeping began in 1963. At the peak of home sales in March 2005, there were 127,000 homes sold in a month – over six times greater (605%) than the current level of sales.
Additionally, each of the three months preceding November also sit among historical lows. August is the third lowest on record, September is tied for the fourth lowest, and October is the second lowest. Therefore, the last four months have been the most stagnant levels of new home sales since record keeping began.
Facing such stagnation, the gradual rise in interest rates over the past seven weeks will not turnaround the housing market by itself. Unemployment is a key aspect of the record low home sales throughout 2010. The unemployment rate is currently at 9.8% and has been above 9% for 19 months – the worse streak since the Great Depression. Basically, a relatively high unemployment rate results with fewer prospective buyers. As a result, a recovery of the housing market must coincide with improvements in the unemployment rate. In other words, there must be prospective buyers in order to revitalize the housing market.
Lastly, the 30-year mortgage rate over the entire year averaged 4.7%. This is the lowest annual rate since 1955, when the average home only cost $22,000. Annual interest rates have declined four consecutive years. Though, this four year streak has a high likelihood of ending in 2011, especially with the rising trend in rates at the end of 2010. While a rise in interest rates may indeed encourage investments, there will not be a demand for housing until the unemployment rate improves.