Much To Fear From Higher Interest Rates?

As we saw throughout the closing of Q3 2013, purchase rates and price gains in the housing sector had slowed notably. This was somewhat of an inevitable development, as the rapid upswing in home closings was spurred in large part by a release of pent-up demand. The housing market began to show signs of enduring stability, and otherwise hesitant buyers were now comfortable enough to invest in new property.

That being said, there was a concrete economic development that contributed to this end of year slowdown in purchase rates. The decision to elevate the remarkably low loan interest rate had the effect of making long-term loan management a somewhat more expensive proposition. As recent analysis from the Washington Post takes into account, this could have the impact of slowing market growth in 2014.

Granted, this could ultimately have an economically stabilizing effect, as the threat of a new housing bubble was a persistent concern throughout 2013. With home prices rising so drastically, certain regional markets risked a sort of “teetering” phenomenon whereby home prices climbed so sharply that otherwise capable buyers wouldn’t be able to afford the potential price tags.

However, federal interest rates more or less cannot be regionally orchestrated, and there were certain economic downsides to their elevation. Young professional, and 20/30-something homebuyers in general were simultaneously the most reluctant homebuyer demographic and its most promising. Many 20 and 30-somethings desperately want to buy homes, but may have lacked the resources to handle weightier mortgage rates. The number of young people who would have liked a home of their own was far outweighed by those who felt secure enough to actually settle on one.

So Is There an Upside to Mortgage Rate Increases?

Ultimately, yes.

As I noted in the above section, higher interest rates slowed purchase rates, which had the impact of slowing the rise in local prices. This seems to be having the dual impact of not only preventing a dramatic phenomenon like a second bubble, but it’s similarly diminishing the sharp rise in local property values. This latter consideration may well have been much less friendly to young buyers than a simple rise in interest rates. It’s a complicated gamble, but by temporarily slowing purchase rates, we may have prolonged the recovery and staved off potential destabilization.

Photo: LendingMemo

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.