Home sales jump: Might rising mortgage rates help, not hurt?

The US housing market showed signs of new life in November, with sales of previously owned homes rising 5.6 percent following several slack months after a special tax credit for home buyers expired.

Sales rose to an annualized pace of 4.68 million homes, up from 4.43 million in October, the National Association of Realtors reported Wednesday.

But even as sales improved, mortgage interest rates were edging up. That trend has continued since November, so a central question now is: Can the housing market keep recovering if mortgage rates are rising?

The answer may be that a modest uptick can actually help, at least for a while. That's because rising rates serve as a signal to potential homebuyers that they might want to jump into the market now rather than wait.

"Rising mortgage rates may paradoxically boost home sales by reminding potential buyers that the recent historically low rates will not last forever," economists Aaron Smith and Ryan Sweet of Moody's Analytics write in a recent report.

According to the mortgage firm Freddie Mac, the average 30-year fixed-rate mortgage now carries an interest payment of 4.83 percent, up from a low of 4.17 percent reached early in November.

It's not clear how much further the upward trend in rates may go in the near term. But many economists expect a gradual increase in interest rates over the next couple of years. That's based expectations of an improving economy (with rising demand for credit) and possible risks of inflation.

Over the longer run, the negative implications for the housing market are obvious. Rising mortgage rates mean that homebuyers can't afford to pay as much for a house. If rates keep rising, any housing-market recovery would occur in spite of that headwind.

Even in the short run, it's not clear if rising rates will give a significant boost to housing demand. In the week ending Dec. 17, mortgage applications for home purchases declined a bit, according to data from the Mortgage Bankers Association. The pace of applications can be affected by many factors other than interest rates.

The good news is that mortgage rates remain historically low, and forecasters generally don't expect them to surge rapidly toward 6 percent.

Looking into 2011, economist Lawrence Yun of the National Association of Realtors describes the outlook as "encouraging."

"The positive impact of steady job creation will more than trump some negative impact from a modest rise in mortgage interest rates, which remain historically favorable,” he predicted in a statement accompanying the release of Wednesday's home-sale data.

Even if the job market improves, boosting demand for homes, the housing market faces some big challenges held over from the recession.

Those include a large inventory of homes for sale (including ones in foreclosure), a big "shadow inventory" of homes that individuals or banks would like to sell, and battles in state courts over whether foreclosures are being processed with proper documentation.

As of November, the Realtors association estimates that a 9.5-month supply of homes is available for sale. That's higher than normal, and many real estate forecasters expect that a supply glut will cause home prices to fall modestly in the coming year.

What's promising in the latest home-sale report is that demand appears to be rising. A tax credit for home buyers helped to strengthen demand during the first half of 2010, but housing activity was slack from July through October.

Mr. Yun predicted that "we should trend up to a healthy, sustainable level [of sales] in 2011.”