Banks May Suffer, but Rising Mortgage Rates Won't Shake Housing

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When megabanks JPMorgan Chase and Wells Fargo reported second-quarter earnings late last week, the effect of skyrocketing mortgage interest rates was front and center. Both banks reported a drop in refinance and new mortgage loan activity, and Wells reported many fewer loans in its pipeline compared to last quarter. JPMorgan noted that refinancing could drop by 40% in the next half-year, and the overall slackening of the demand for mortgages might be worse than analysts have predicted.

Does this mean that the slowly recovering housing market is stumbling, right along with rising rates? Apparently not, and most experts seem to agree that it will continue to thrive, despite higher mortgage rates.

Higher home prices, looser credit
Despite JPMorgan's glum predictions regarding its future mortgage revenue, its own analysts have opined that housing will survive the new rate environment. Higher home prices, fewer foreclosures clogging the market, and softening lending standards will keep housing hopping, according to a recent report.


Are looser lending rules truly in the offing? Many think so, and it's a sensible deduction to make. With other avenues of mortgage revenue drying up, banks will have more incentive to relax some of the extremely strict rules they put in place after the mortgage crisis. As my colleague John Maxfield recently noted, this phenomenon is an agreeable consequence of rising mortgage rates.

Others, like Paul Willen, a senior economist at the Federal Reserve Bank of Boston, concur. Just last month, Willen stated that, as home prices rise, banks will see their way clear to writing more loans, rather than take in less revenue. Similarly, real estate website Zillow has seen an increase in lending to consumers making smaller down payments, while the chief economist at CoreLogic has observed a movement back toward the loan parameters lenders used during the 1990s.

Confidence is high
Federal Reserve Chair Ben Bernanke commented last month that rising interest rates are the result of an optimistic outlook on housing in particular and the economy in general. Optimism is a good thing, of course, and several recent developments appear to support his view.

The National Association of Home Builders/Wells Fargo Housing Market Index, which measures builders' outlook for the next six-month period, rose six points this month, to 57 -- which the group asserts is the highest level seen since the beginning of 2006.

Perhaps reflective of optimism in the broader real estate market is Realtor.com's announcement that housing inventory increased to its highest point in June, to 1.9 million homes for sale, representing an increase of 4.3% over the past year.

Even Fannie Mae is chiming in. The agency's Vice President of the Economic and Strategic Research Group wrote a commentary on Fannie's website, using historical data to show how the current rise in interest rates will likely not derail the housing recovery.

Time will tell whether these harbingers of good tidings pan out, but, if they do, I think it will be the beginning of a true housing recovery. After all, a market dominated by distressed properties and overly tight credit regulations will never get the housing sector -- and the greater economy -- back on its feet. So, if it takes higher mortgage rates to get us there, I'm all for it.

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The article Banks May Suffer, but Rising Mortgage Rates Won't Shake Housing originally appeared on Fool.com.

Fool contributor Amanda Alix has no position in any stocks mentioned. The Motley Fool recommends Wells Fargo and Zillow. The Motley Fool owns shares of JPMorgan Chase, Wells Fargo, and Zillow. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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