Capital Economics Expects Recovery to Continue Even with Higher Rates

By: Esther Cho, DSnews.com

Even with recent reports of rising mortgage rates and falling home prices, Capital Economics stated it still expects the housing recovery to be underway. The research firm cites two reasons in a report on why mortgage rates won’t threaten recovery: rates can only rise so far when tighter monetary policy is still years away, and homes will still be affordable even if mortgage rates were to rise back to normal levels. Last week ending March 15, Freddie Mac reported the 30-year fixed rate at 3.92 percent, an increase from the 3.88 percent reported the prior week, but still below 4 percent for 15 consecutive weeks.

“We doubt that higher mortgage rates will derail a housing recovery that in the last six months has seen total home sales rise by 13 percent and the NAHB homebuilder activity index more than double to 28,” the research firm stated.

In addition to those recent reports, home prices are still dropping, with data from Zillow showing prices declined 4.6 percent from January 2011 to January 2012. “Also, the fall in house prices over the last five years has been so large that even more normal mortgage rates would leave housing looking very affordable. And with housing appearing undervalued relative to disposable incomes per capita, valuations are also very favorable,” Capital Economics stated.

An economic outlook report from Fannie Mae echoed a similar sentiment about the direction of the housing market in a report Monday and stated, “GDP revisions for the fourth quarter of 2011 indicated a stronger underlying pace of demand with higher consumer spending and business investment.” After four months of private sector payroll growth, the GSE named employment growth as an important factor in housing recovery.

Even with declining home prices, Capital Economics explained it can take up to six months for changes in demand and supply to have their full impact on house prices because even with attractive asking prices, it can still take a few months to find a buyer and another month or so before the contract is closed.