Growing mortgage rates will test the housing market

Economists predict what will happen when the Federal Reserve raises interest rates
June 23, 2015 09:01AM

For the past five years, mortgage rates in the U.S. have remained around 50-year lows — a situation that has allowed healthy price growth, with double-digit percentage price gains in 51 metropolitan areas in the first quarter of this year. But if the Federal Reserve raises interest rates later this year, as many suspect it will, this momentum could be thrown off.

Rates on 30-year conventional mortgages averaged 4 percent last week, and before that, they had been below 4 percent since November, according to the Wall Street Journal.

“The rates have been so low for so long that trying to persuade anyone that 4% or 4.5% is still a bargain may not be easy to do,” said said Glenn Kelman, chief executive of brokerage Redfin.

If the Federal Reserve raises interest rates, mortgage rates are expected to rise over time.

Economists say that modest increases are unlikely to knock people in many metro areas out of the buying market, because for-sale housing is still relatively affordable compared to average incomes, especially when compared to rising rental prices.

However, in expensive West Coast housing markets like Los Angeles, a mortgage rate of 4 percent means that a typical household would have to spend 41 percent of its income on mortgage payments for a median-priced house. [WSJ] — Tess Hofmann