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Are rates spooking homebuyers?

By Judy Martel ·
Friday, July 12, 2013
Posted: 5 pm ET

Many analysts are worried that rising mortgage rates will throw cold water on prospects for the improving housing market, but mortgage interest is only one of the factors in the decision to buy.

"The pickup in homebuying activity over the past year is primarily a function of an improving economy, and while low mortgage rates help, that isn't the main reason people are buying homes," says Greg McBride, senior financial analyst for Bankrate.

Finally rising from the underwater depths

The increase in home prices has improved home equity for many who were underwater in their mortgages, providing them with incentive to sell their current homes to buy others. In much of the country, home prices are still off the peaks attained during the housing bubble, and rates, though higher, are still attractive. Taken together, homeownership is still relatively affordable.

"As it stands, although the rise in rates does detract from (home) affordability, that affordability is still great," says McBride. "The bigger concern of prospective homebuyers currently is the lack of inventory available for sale and the ensuing bidding wars that are pushing up home prices in some areas of the country."

Things are looking up

Another big factor in the decision to buy a home is consumer confidence in the employment and economic outlook, which has been on the upswing, McBride notes.

"Mortgage rates were plenty low over the past few years, but when the economy stinks, nobody wants to buy a house," he says. "Now that people are starting to feel a little more comfortable about the economy and their financial situations, they become more willing to take the plunge into homeownership."

But that doesn't mean that if rates continue their trajectory, it won't stall the market, McBride says. "Should mortgage rates continue to rise, there is a risk that it becomes a drag on homebuying, not because people give up on buying, but because they decide to sit back and wait until the dust settles."

Keep up with your wealth and mortgages, and follow me on Twitter @JudyMartel.

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