mortgage

Mortgage rates may trend higher in 2014

Ryan D. Israelsen, Assistant professor of finance, Indiana University When the housing bubble burst, the fallout was worst in the so-called "sand states" -- California, Nevada, Arizona and Florida.

But with a nationwide housing recovery finally and firmly under way, those hard-hit markets are now seeing strong recoveries, according to Ryan D. Israelsen, assistant professor of finance at Indiana University's Kelley School of Business in Bloomington, Ind.

Most other markets across the nation also are seeing price gains. Israelsen believes that trend is likely to continue throughout 2014, as long as the slow-but-steady economic recovery stays on track.

However, the Federal Reserve's decision to "taper" its purchase of long-term Treasuries and mortgage-backed securities means mortgage rates are likely to rise this year, he says.

Israelsen explains his outlook for the nation's housing market in the following interview.

Mortgage rates have jumped from their recent lows and appear to be gradually climbing. If that trend continues, how is it likely to affect the housing market?

While mortgage rates are higher than they were a year or two ago, they are still relatively low from a historical standpoint and are lower than their highs from last summer.

That being said, increases in mortgage rates typically do affect mortgage applications. In general, mortgage refinancings are affected more than mortgages on new homes, or on sales of existing homes.

To understand how higher mortgage rates may affect housing markets, we need to know why rates have been rising over the past year. The most direct cause of the increase in rates this past year was the Federal Reserve's decision to "taper" its purchases of long-term treasuries and mortgage-backed securities.

The Fed had been waiting until they were confident that markets (especially housing markets) were robust enough to justify the reduction in purchases. When this decision was finally announced last summer, there was a bit of a panic and rates immediately rose.

This seemed to catch the Fed slightly off-guard, and they then surprised almost everybody and delayed the taper a few months. The signal that they've sent, however, is that they expect that the economy has improved enough that higher mortgage rates will not negatively affect housing markets.

Housing is local, as the old saying goes. Which markets appear to have done best in the recent run-up, and why?

According to the Case-Shiller house price indexes, the markets that have had the most price appreciation in the past few years are those that had the biggest crash when the housing bubble burst: Phoenix, San Francisco, Las Vegas, Los Angeles and Miami.

These markets are booming for various reasons. All are coastal or warm climates. Miami and Las Vegas have had an influx of demand from foreign investors. Phoenix and San Francisco have had robust economic recoveries leading to an increased demand for housing. In Los Angeles -- and, indeed, in most of these markets -- the boom is driven partially by a short supply of housing.

Which markets are lagging, and why?

Prices have been increasing in virtually all major markets. However, some that have not fared as well are New York City, Cleveland, Charlotte and Boston.

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Part of the reason could be that they started from a higher level. These Northeastern markets were all affected by the housing bubble, but not to the extent that markets like Phoenix and Las Vegas were.

What do you expect 2014 will bring? Will the trend of more sales and climbing home values continue?

It's hard to predict what will happen, but barring a reversal off course by the Fed or an unexpected downturn in the economy, mortgage rates are likely to rise. Prices are also likely to rise.

It's not clear what will happen to sales. The latest numbers are mixed. The Commerce Department recently reported that purchases of new homes rose sharply in January -- much more than economists had expected. However, the National Association of Realtors reported that the rate of sales of existing homes was the lowest in 18 months.

What advice would you have for people who want to buy a home but just cannot get approved for financing?

There are several steps these individuals can take to improve their chances.

First, do not be afraid to ask the lender why you were not approved. You may think you know the answer, but you may be surprised.

Second, take steps to improve your credit score. There are many useful guides available from reputable sources on the Internet. Some of these steps are very simple and effective.

Third, many states offer down-payment assistance programs for borrowers that are likely to be successful homeowners. Check with your state's housing finance agency for more information.

Finally, a local lender may be more willing to lend to homeowners from their community than a national lender (would be), so look around. However, be careful when "shopping around," as your credit score may be negatively affected if you make too many inquiries over an extended period of time -- usually more than 30 or 45 days.

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