Could Rising Mortgage Rates Hurt the Economy?

Could Rising Mortgage Rates Hurt the Economy?

Thinking of buying a home? You may want to think fast — with mortgage rates climbing for the sixth consecutive week, that property you've been eyeing could suddenly cost you more than you bargained for.

But beware: hoards of buyers scrambling to lock in rates are putting the housing market on shaky ground, and could ultimately slow the country's climb out of the recession.

The number of mortgage applications was on the decline until last week, when applications increased by 5% as the fear of rising rates caused buyers to pounce. If buying continues at this pace, the market could soon face a shortage of sellers, and home prices would take a hit.


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"The Biggest Threat"

Record-low interest rates helped draw the housing market back from the brink following the recession. While rates remain lower than they were before the bust, rates on the 30-year mortgage recently hit almost 4%, an increase of over two-thirds of a percentage point since May.

“The biggest threat to the recovery is that rates rise too fast,” Mark Zandi, Moody’s Analytics' chief economist, told The Washington Post.

Depending on what the Federal Reserve decides about curbing the stimulus plan, rates could soon skyrocket even higher.

Falling percentages of people applying to refinance are already pointing to trouble. Numbers have dropped 36% since the beginning of May, and by 11% over the past two weeks.

Yet home prices have seen healthy growth over the past year and home builder confidence is peaking, according to recent government reports. The number of foreclosures has also dropped.

There is much room for improvement, but the housing market is “light-years away from a few years ago,” Zandi says. “We’re well on our way, and housing is on the verge of a good, long run.”

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