Rising interest rates may not have much impact on US home sales because rates still very low by long-term standards; market also seeing large amount of pent-up demand, says real estate broker

Allison Oesterle

SANTA ANA, California , July 19, 2013 (press release) – Mortgage rates are rising and the record low interest rates seen in 2012 are unlikely to return anytime soon. So, is the real estate market about to flounder?

"We need to have some context," said Wendy Forsythe, executive vice president and head of global operations for Carrington Real Estate Services, a full-service real estate brokerage with offices in more than 25 states. "Mortgage rates in 2012 were at the lowest levels seen in 65 years. Today rates are higher -- but are still low by historical standards. Enormous amounts of affordability remain in the marketplace."

Rates in mid-2013 remain at abnormally-low levels by historic standards. As a result, real estate activity has been strong in most areas. Existing home prices in May increased 15.4 percent from 2012, according to the National Association of Realtors.

"Many factors influence home values," said Forsythe. "Interest rates are visible and easy to understand, but they're not the only ingredient which impacts the marketplace."

Still In Recovery

One result of rising real estate demand is that owners have additional equity. Residential real estate increased in value last year by $784 billion according to the Federal Reserve.

"We're seeing fewer distressed homes on the market," said Forsythe. "Foreclosures and short sales typically sell at discount and such sales impact nearby properties because they show up in the comps. As values rise, many properties are no longer underwater. Owners who had once faced a loss can now sell and get cash at closing."

Figures from Fannie Mae and Freddie Mac show they completed fewer than 26,000 short sales in the first quarter of this year compared with almost 31,000 in 2012. Their foreclosure starts are down even more dramatically: 141,000 in the first quarter versus 226,000 during the same period last year.

Forsythe explained that "smaller numbers of distressed homes mean bargains are still available for buyers. At the same time, as the number of distressed sales decline, such transactions have less pricing impact on the overall marketplace."

Pent-Up Demand

Home values reached their peak in April 2007. Thus, one can argue that while home values increased during the past year, the possibility of higher prices remains. That's especially true in the leading markets and at a time when many people are looking for real estate. But even if prices and volumes merely grow with the economy on a national basis, as many analysts suggest, demand for homes is likely to be strong.

"There is a lot of pent-up demand in the system," said Forsythe. "First, employment levels have solidified, so people who did not have the financial standing to obtain a mortgage can now come back into the market.

"Second, people who faced foreclosure or sold with a short-sale are beginning to return to the market. Distressed sales owners usually must wait two to seven years before they can again qualify for a loan. With time passing, more and more people who faced hard times are once again looking at real estate ownership.

"Third, because of the tough times faced during the past few years, we have seen a lot of inter-generational housing -- homes where adult children have moved back in with their parents or grandparents. With a better economy, some of those children are now ready to move back out and buy on their own."

Events on Capitol Hill

We don't know what will happen in Washington, but we do know that policy decisions can impact the real estate marketplace.

For instance, if the Federal Reserve reduces its monthly purchases of mortgage-backed securities, it could lead to higher interest rates. We saw evidence of this in May when rumors of fewer purchases began to spread. The Fed's June 19th press conference added to concerns in the market and pushed rates up (though rates remain well below any historic highs).

"Because interest levels are so low by long-term standards, the impact of 'rising' rates may be less than we think," said Forsythe. "For instance, existing unit sales in May were almost 13 percent higher than in 2012. The real questions are how much rates will change, how quickly and what will be the impact on affordability."

Another issue concerns how Washington will move on immigration reform. Reform could create three million new home sales, as well as additional mortgage originations worth $500 billion, according to estimates from the National Association of Hispanic Real Estate Professionals (NAHREP).

"There's a lot of demand which remains in the marketplace," said Forsythe. "You can see this with the latest look at metro markets nationwide. A July report from the National Association of Home Builders shows that conditions have improved in 255 metro areas in terms of housing permits, employment and home prices for at least six consecutive months. That's down a little from June -- but three times the number of metro areas that were improving a year ago."

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