Freddie Mac: Increasing Rates Won’t Shut Down Recovery

""Freddie Mac"":http://www.freddiemac.com/ maintains in its latest U.S. Economic and Housing Market Outlook that rising mortgage rates shouldn't have a significant impact on housing affordability or the recovery for the time being.

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Interest rates have climbed about 0.5 percentage points since the beginning of May and are expected to hover around 4.0 percent during the second half of the year, according to the Office of the Chief Economist. Since last year's refinance boom was tied largely to record-low rates, the office anticipates a sharp decline in refinance volume over the rest of 2013, forecasting about $1.1 trillion in refinance originations (down from $1.5 trillion in 2012).

However, while refinance volume is expected to suffer, demand should continue to carry the recovery for some time, the report says.

""The recent upturn in interest rates is sparking fears among some that the nascent economic and housing recoveries will be choked off before they produce sustained growth. However, with the exception of high-cost markets, primarily San Francisco south to San Diego, and Washington, DC north to Boston, which are already challenged with affordability, house prices in most of the country are very affordable,"" said Frank Nothaft, VP and chief economist at Freddie Mac.

At today's prices and income levels, mortgage rates would have to rise to nearly 7 percent before the national median-priced home would be unaffordable to a family making the median income. (Even at that rate, many markets would still be affordable at the median income level, Freddie Mac notes.)

""So while rising interest rates will reduce housing demand, rates would have to increase considerably more before the reduction in demand for home purchases would be substantial,"" Nothaft said. ""Nothing in the recent trends suggests that we need to fear a major slowdown. A gradual rise in interest rates will not derail the recovery, and are an indication that the overall economic situation is improving.""