According to the Real Estate Outlook, Market Trends and Insights, a publication by the National Association of Realtors, home prices will not be significantly affected by rising interest rates. But to Realtors who are already beginning to see sales slow down, the NAR's proclamation may hold little comfort against jitters that sales will flatten. How worried should Realtors be?

Not very, says NAR.

Senior Forecast Economist Lawrence Yun acknowledges that mortgage rates have "turned sharply higher in the course of just over a month."

"The average 30-year fixed mortgage rate touched bottom at 5.2 percent in mid-June and rose to 6.2 percent in late July," says Yun.

Yun doesn't believe that interest rates will retreat back to the five percent range. "A few years from now when we look back to today, those rock-bottom rates will look like nothing more than a single month data quirk, and the sharp bounce will look nothing more than a proper market correction."

Interest rates are still below what they were a year ago, which is still lower than any time in recent history since the mid-1960's.

Yun predicts that because inflation continues to be low, mortgage rates will not rise above 7 percent in the foreseeable future.

To support his opinion, Yun looks to historical data which shows several instances of rising interest rates that show that only when rates rise "in excess of two percentage points and if rates reach 9 percent or higher" do sales "measurably decline."

"Trust me," says Yun. "We aren't even remotely close to that." He also mentions that the economy is "poised to make solid gains." He predicts that the economy will add two million jobs in the next near and a half, assuring that demand for housing will remain solid.

But interest rates do impact how much home people can buy, so there is the potential that some sales may be impacted by rising interest rates.

"Generally, a one-percent increase in mortgage rates means households need to reduce their potential home purchase price range by 10 percent to get the same monthly mortgage payment," suggests Yun.

Yun acknowledges that the mortgage rates versus existing home sales does not take into account non-mortgage rate factors. Those factors can be widespread from the local and national economy and jobs to politics to world events.

For example, from early 1974 to late 1974, mortgage interest rates went from 7.4 percent to 8.8 percent resulting in a 15 percent housing sales decline. What was happening in 1974? The Watergate scandal in which a U.S. president resigned rather than face impeachment. The beginnings of the oil crisis. Recession.

The most catastrophic event in recent memory, the attacks of September 11, didn't have a negative impact on housing sales. Housing continued its record-setting pace begun in 1998, with only the slightest of dips. By the second quarter of 2003, housing reached all-time historical high sales levels, according to data compiled by the NAR and the Bureau of the Census. Economic growth, meanwhile, went negative in the first quarter of 2001, but leaped into positive territory by the fourth quarter of 2001.

By July, 2003, existing-home sales were up 5.0 percent to a seasonally adjusted annual rate* of 6.12 million units in July from a pace of 5.83 million units in June - 13.8 percent above the 5.38-million unit pace set in July 2002. The previous record was a 5.94-million unit rate, set in both December 2002 and January 2003. Sales counted in July were set in motion as much as a month to three months previously, and closed while interest rates were still at record lows.

So what does the future hold? Some good economic news is promising, even if it is only temporary. Fuel prices halted an upward march, falling to one month lows by September 1, 2003. Employment numbers are improving as the economy loses fewer jobs than it has in four months, a consecutive number not seen since 2000, as announced on August 29th. But economists remain concerned that jobs aren't being added to the economy, calling the current state the "jobless recovery." Others say that job cuts could escalate by the end of the year, when companies typically let more people go than they do in the middle of the year - by 36 percent.

In the end, the state of housing depends on what it has always depended upon - jobs.

Published: September 3, 2003

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