Homebuyers are rushing into the housing market as interest rates rise, afraid they might miss the low-rate boat.
But low inventory and cooling demand from investors as prices rise likely will contain the frenzy and keep bidding wars from pushing the housing market into bubble land, experts say. At the same time, they say, an improving economy will support demand for homes.
And higher prices and rates may spark sellers who are in waiting mode to list their properties, easing the supply crunch.
Mortgage rates rose for the fifth straight week, the Mortgage Bankers Association reported Wednesday.
Loan applications had fallen 7% to 10% and more each week since rates started rising in early May. But that changed last week, when mortgage applications increased 5%, the MBA said .
End Of An Era
Realtors and lenders say would-be buyers may now sense the end of an era of ultralow mortgage rates as the economy improves and concerns grow that the Federal Reserve may soon start tapering its aggressive bond buying program, which has kept rates at historic lows.
Loans for both refinancing and home purchases grew 5% from the prior week even as key interest rates reached yearly highs.
The 30-year fixed-rate mortgage edged up to 4.15% from 4.07% a week earlier, the highest since March 2012, the MBA said. The jumbo 30-year fixed rate rose to 4.25% from 4.20%.
Concerns that the central bank will ease its support caused a wide sell-off in stocks Wednesday. Like the overall market, homebuilders generally rose in morning trading but several, including Lennar (LEN), PulteGroup (PHM) and Toll Bros. (TOL) later gave up gains to end the day flat. D.R. Horton (DHI) ended up almost 1%.
The Fed will likely provide more commentary on its asset-purchase plans at next week's meeting.
"Seeing rates tick up, and fairly steadily, is starting to convince consumers that their window of opportunity may be closing," said Erin Lantz, director of Zillow Mortgage Marketplace.
'Spurred To Action' Regarding last week's uptick in refinancing, homeowners still on the fence may have felt "spurred to action, thinking 'better get in while I can,'" she said.
Two weeks ago mortgage applications had dropped 11.5% as rates inched up for the fourth straight week. Most of the recent weeks' fall-off in loan activity was due to steep drops in refinancing, though purchase volume fell slightly.
Despite last week's rise in refi activity, the overall refi trend line is down and will continue to drift lower due to higher rates, said David Stevens, CEO of the Mortgage Bankers Association.
"Purchase volume is a different story and it's a reflection on the growth of the economy," he said. "We don't expect any real impact to home sales as a result of these rising interest rates.
The MBA expects 30-year fixed rates to level off at 4.5% by the end of the year and stay around that level in 2014.
It forecasts a 4.1% rise in home prices this year on a national basis and a 4.5% price rise next year.
"The housing economy is on a stable and steady pace of improvement through the next several years," Stevens said, adding that home prices will likely grow in the low single digits annually. That would be back to the norm of the prebubble years.
Buyers may not have gotten Stevens' reassuring memo. A buying frenzy continues in many markets across the U.S., especially in major employment centers such as New York, San Francisco, Los Angeles and Texas.
"The last two months in Houston, Austin and San Antonio have been record months in closed and written volume," said Wendi Harrelson, area director of South Texas for Keller Williams Realty.
She says buyers have a new sense of urgency as interest rates rise. "Half a percent could take them out of the price range they were used to looking at," she said. "It makes them realize that if they wait any longer, they'll be living in something worse. Maybe they'll have to give up the fourth bedroom, the garage or the upgrades.
Buyers on the prowl for luxury homes might not feel as pressured to cut down on their wish lists.
"I have not seen the market slow down at all over the past month," said Robert Cohan, president of mortgage bank Carlyle Financial in Beverly Hills, Calif. He focuses on homes from $1.5 million to $2.5 million.
"From the clients I'm dealing with on a daily basis, the number 4 (percent mortgage rate) still sounds very attractive to them," Cohan said.
Rates started rising the week ended May 10, when the 30-year fixed went to 3.67% from 3.59% the week before.
But rates remain low relative to the long-term norm, notes Jed Kolko, chief economist with real estate web company Trulia.
During the height of the housing bubble in 2005 and 2006, 30-year fixed rates were between 5.5% and 7%.
"Interest rates have never deterred people from buying a house. It's just limited them in what they could buy," said Harrelson in Texas. "When I started in the business in 1991 it was 9% and I was refinancing homes that had a 17% rate.
Home prices continue to rise as inventory levels remain low, but most experts don't see a bubble brewing.
Based on supply, demand and realistic expectations about the future, "Prices actually look undervalued compared to their long-term norm," Kolko said. "Even the most overvalued markets, such as Orange County, Calif., are pretty close to being at fundamental value.
Higher interest rates could slow price gains "a bit," Kolko says, adding that prices are "unlikely to go down in most markets.
Price gains also could be slowed by waning demand from investors and a gradual increase in inventory as builders ramp up production to try to keep up with demand, he says. "We're starting to see inventory expand in some markets, but inventory will still be tight for at least another year," Kolko said.
The MBA expects builders to sell 430,000 new homes this year, up from 366,000 last year. Its forecast for next year is for 480,000 new homes. In many markets where supply is short, "Builders cannot build new homes fast enough," said Stevens.
Cohan hopes higher interest rates will serve as a wake-up call to sleepy would-be sellers, on the premise they would think they are "missing the boat.
"I think 5% could be a psychological turning point. We haven't seen 5's in a long time."