A recent, sharp rise in mortgage-interest rates has raised concerns about whether the housing recovery will soften as home loans become more expensive.
Last week, the average rate nationwide for a 30-year mortgage jumped to 4.46 percent from 3.93 percent - the biggest one-week increase since 1987 and the highest rate since July 2011, according to the Federal Home Loan Mortgage Corp.
"We do think that, as rates go higher, there will be additional affordability issues," said Brad Hunter, a Florida-based economist for the real estate research firm MetroStudy Inc.
"Everyone is getting nervous now as the Fed is taking away the Kool-Aid bowl soon," he said. Rates started moving up after the Federal Reserve said on June 19 that it might end its economic-stimulation program by the end of this year or in 2014.
An increase in interest rates could temper the housing recovery in several ways.
For one thing, higher rates would mean prospective buyers could afford less house, possibly easing demand for homes.
For another, the equity funds that have been buying up foreclosures would likely go looking elsewhere for better ways to invest their money, which would likely limit competition for new listings. Home builders may be pressured by higher carrying costs, even as fewer prospects show up to tour their model units. And homeowners not interested in selling would be less likely to refinance their existing loans.
Here's a closer look at the effect of rising rates:
Buyers: For home buyers, many of whom have struggled since the recession and global credit crisis to
qualify for mortgages, an uptick in rates would also cut into their buying power once they were approved for a loan.
For example, buyers who obtained a $200,000 mortgage when interest rates were about 3.5 percent in April landed a monthly payment of about $900. But if rates head north to 5 percent, buyers hoping to get that same monthly payment would have to limit their mortgage to $170,000 - or $30,000 less than they could have afforded with the lower loan rate.
In a talk to Congress last month, Fed Chairman Ben Bernanke noted that housing's vital role in the nation's economic recovery is due partly to the real estate-related jobs it creates "but also because higher house prices increase consumer wealth and promote consumer spending."
Over the 30-year life of a $200,000 mortgage, however, a home buyer would pay an additional $63,000 in interest with a 5 percent rate than with a 3.5 percent rate - money not available for spending on consumer goods or services.
And even though mortgage lenders stand to earn more money with higher rates of return on their loans, borrowers would not find it easier to qualify for home loans should interest rates keep rising, said Rob Nunziata, president of Orlando, Fla.-based FBC Mortgage LLC.
"With some of the new regulations taking effect soon, such as QM - qualified mortgage - I think you will see lenders actually tighten guidelines as opposed to loosen them," he said.
The qualified mortgage rule, issued by the federal government's Consumer Financial Protection Bureau, aims to crack down on loose lending practices. Among other provisions, it does not allow mortgages that would bring a home buyer's total monthly debt payments, including property taxes and insurance, to more than 43 percent of the person's gross income.
Investors: Institutional buyers are likely to slow the pace of their distress-sale home purchases if interest rates rise and other investments become more attractive. Whether they also dump the properties they have already purchased or hang onto them would depend on the demand for single-family-home rental properties.
"I think the major equity players, like Blackstone (Group), that brought volume purchases to the real estate industry will retreat from the purchase of individual homes," said Owen Beitsch, senior principal of Real Estate Research Consultants Inc. of Orlando. "This asset class is simply much too management-intensive, and the spread between cost and return is decreasing."
John Tuccillo, chief economist for Florida Realtors, said he expects the pace of investor purchases to slow "during the next year or so." He added that, while he doesn't expect equity funds to sell off their newly acquired houses, he figures they will cut back on picking up new ones.
Diminished demand for investment houses would put pressure on prices to fall, though areas with low inventory would more easily handle an increase in available properties without prices tanking.
Builders: Home builders would also have to adjust as prospective buyers grapple with reduced spending power. A certain slice of that group would scale back their search to existing-home listings, said Hunter, the MetroStudy economist. Others would settle for smaller new homes or for developments in more-remote locations, he added. And builders would face costlier carrying costs for land and materials as they wait for enough buyers to close out a project.
In the short term, Hunter said, the jump in interest rates could give the market a boost, as prospective home buyers who have been hesitating to act decide to buy now, assuming rates will only continue to rise.
Homeowners: For those already in a home and intent on staying there, refinancing their current mortgage would make less sense if rates continue to escalate, Nunziata said.
The number of refinanced mortgages grew significantly in 2011-12, with home-purchase loans becoming a smaller part of the overall mortgage mix, he said. The last time the refinance market experienced a big boost, he noted, was back in 2001-03, when rates dropped to 5.25 percent from 7.25 percent.
Mortgage lenders who have been specializing in refis are likely to go out of business "sooner than later" if interest rates keep rising, he added.
"The lenders that focus on purchase business will be in good shape, as long as the economy continues to improve," Nunziata said.