Will Rising Mortgage Rates Push Housing Into a Double Dip?

Mortgage Rates Are Rising: Is Housing Headed For a Double Dip?
Mortgage Rates Are Rising: Is Housing Headed For a Double Dip?

Federal Reserve Chairman Ben Bernanke has said in no uncertain terms that he wants to keep short-term interest rates low for an extended period of time. But that won't stop mortgage rates from rising. Last week, the national average for 30-year fixed-rate mortgages climbed to 5.21%, the highest it has been since August 2009. Rates started edging up as the Federal Reserve stopped buying mortgage-backed securities last week.

What does that mean for the housing market? Probably nothing good. The more expensive it is to buy a house, the less likely people are to do it -- especially given that so many potential homebuyers are either are cash-strapped, underemployed or simply can't secure financing because of lenders' rigid credit requirements.

The Mortgage Bankers Association said Wednesday that its Market Composite Index, which measures mortgage loan application volume, fell 11% last week on a seasonally adjusted basis from the week prior.

50-50 Odds

The current economic conditions beg the question of whether the housing market is headed for a double dip -- that is, whether another sustained drop in housing prices is in store after several months of price increases. Bob Shiller, co-creator of the S&P Case-Shiller Index, thinks the odds are 50-50 of slipping back into a period of home price declines.

"Double dips are rare. When prices go up, they tend to go up for years. . . . Whereas if they start gong down, they'll go down for years," Shiller recently told BusinessWeek. "We saw home prices decline between 2006 and 2009 -- three years of decline. And now that the market is trending up . . . it's perfectly plausible to think we'll have three more years of increases. But I'm not so sure. . . . We're in such an unusual economy that [a double dip] has substantial probability."

The National Association of Realtors -- a trade group known for its fairly bullish view of the real estate sector -- predicts that sales will surge nicely in the second-quarter and then decline in the third quarter, with the possibility of a pickup in the fourth quarter. The group is also projecting 30-year fixed rates could climb to 5.86% by year-end.

"The bottom line is that we're projecting sales to rise 6% to 7% this year," says spokesman Walter Molony. "We're looking for stabilization of prices by midyear." But it's hard to chart the future course of the housing market without knowing how the job market will shape up. If the unemployment were to swing much higher again, all bets are off.

Originally published