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What rising mortgage rates really mean for the housing market

·3 min read

Mortgage rates may be on the rise, but that doesn’t necessarily mean the housing boom is about to go bust.

For the third consecutive week, mortgage rates pushed past 3%, with the average 30-year fixed loan hitting a nine-month high of 3.09% last week, according to Freddie Mac. The uptick is being driven by a rise in the yield on the 10-year Treasury, which is closely tied to consumer loans like mortgages, credit cards and auto loans.

Rising mortgage rates typically signal a recovering economy, and despite applications for mortgages dropping week-over-week, Lending Tree’s Chief Economist Tendayi Kapfidze told Yahoo Finance Live that the rates are still “very favorable” for home buying.

“If you look over the past 10 years, mortgage rates are still lower than 95% of the time, and over the past 30 to 40 years, they’re lower than 99% of the time,” Kapfidze said.

The biggest challenge for the housing market continues to be low inventory, and last year’s rush to refinance is only adding to the problem, he said. The National Association of Realtors said Monday that inventory reached a record low of 1.03 million units in February, down 29.5% from one year ago — the largest ever annual decline.

“Last year’s refinance boom, where a lot of people locked in much lower rates is actually going to create more inventory challenges because less people are going to be willing to move from their houses because they’ve gotten these historically low rates on their current mortgages,” he said.

As a rule of thumb, refinancing makes sense if you can shave a full percentage point off your current mortgage rate. But there are other factors to consider — including loan terms, closing costs and how long you plan to stay in your home.

If your refinancing saves you $100 a month, but you paid $3,000 in closing costs, it will take you 30 months just to break even. If you’re not planning to stay in your house for that amount of time, Kapfidze said it may not be the time to refinance.

A sign sits in front of a KB Home construction site, Tuesday, Feb. 2, 2021, in Simi Valley, Calif.  U.S. homebuilders are poised to benefit this spring homebuying season amid strong demand, low mortgage rates and an all-time low inventory of previously occupied homes for sale. But soaring lumber prices and a shortage of construction-ready land could limit builders’ ability to capitalize on the strong housing market trends, analysts say.  .(AP Photo/Mark J. Terrill)
A sign sits in front of a KB Home construction site, Tuesday, Feb. 2, 2021, in Simi Valley, Calif. U.S. homebuilders are poised to benefit this spring homebuying season amid strong demand, low mortgage rates and an all-time low inventory of previously occupied homes for sale. But soaring lumber prices and a shortage of construction-ready land could limit builders’ ability to capitalize on the strong housing market trends, analysts say. .(AP Photo/Mark J. Terrill)

Supply shortages for materials like lumber are also squeezing inventory. Lumber prices are up about 200% over the past year, which is adding roughly $24,000 to the price of a new home, according to The National Association of Home Builders.

While rising raw material costs may make it harder for potential homebuyers to buy, the recent rapid rise in mortgage rates is expected to level off. Kapfidze believes rates will rise more modestly over the course of the year.

In order to get the best rate, he recommends using an online mortgage calculator to estimate your monthly payments.

Don't forget to add those closing costs like insurance, taxes and appraisal fees, and shop around. Kapfidze recommends talking to at least three to five lenders before locking in a rate.

His general advice? Try not to time the market, and if the numbers make sense, seize the opportunity.

“Participate in the market as it’s presented to you," he said. "You can get into a lot of trouble trying to game out where rates are going to be. Look at the market today, figure out if you can benefit today, and take action if you need to.”

Alexis Christoforous is an anchor at Yahoo Finance. Follow her on Twitter @AlexisTVNews.