Rising Mortgage Rates Pose Test for U.S. Housing Market.

U.S. mortgage rates have hit their highest level since 2014, a new challenge for a housing market that has been central to the economic recovery but remains vulnerable to even modest headwinds.

The rate for a 30-year fixed-rate mortgage rose to 4.46%, the highest in more than four years and the ninth consecutive week of increases, according to data Thursday from mortgage-finance giant Freddie Mac . At the start of the year, the average rate was 3.95%.

If the trend persists, it could hamper a sector that represents about 15% of U.S. gross-domestic product. Rising mortgage rates already have crimped refinancing activity and pushed would-be home buyers who are on the margins out of the market as home prices also have risen.

“This is almost like a double whammy for the borrower,” said Pete Boomer, head of mortgage production at PNC Financial Services Group Inc. PNC +1.89%

Rising rates already have made some current homeowners less likely to move, creating a bottleneck throughout the system.

Mark Rutkowski and Erin Wilder recently considered leaving their Long Island, N.Y., home east of New York City to find a place with more room for their three boys, but decided instead to renovate. They bought their house in 2012, with a mortgage that had a rate of 3.75%, and know they couldn’t get the same deal.

“A couple of tenths of a percentage point on a mortgage could easily swing your decision,” said Mr. Rutkowski, who is an attorney at an insurance company.

While the rates remain low by historical standards, millennial buyers, who are often making their first home purchase, could suffer sticker shock. “They will be the preponderance of the market purchasing homes over the next 10 years,” said Ed Robinson, head of the mortgage business at Fifth Third Bancorp. “And they’ve never seen 5%.”

A continued increase in home prices has been a sign of strength for the economy. But in recent months, home-sales activity has dropped sharply amid low inventory levels, tax-code changes and buyers’ growing weariness from being priced out of the market. Economists say the rise in rates poses a particular challenge because it comes as prices have shot up so quickly.

“One of the bright lights has been low rates and that bright light is dimming a bit,” said Nela Richardson, chief economist at real-estate brokerage Redfin.

Mortgage rates this year have risen faster than economists expected, but their increase was steeper in two recent cycles.

During the so called taper tantrum in 2013, when investors anticipated that the Federal Reserve would pull back from its bond-buying program, rates rose from 3.35% in early May to 4.51% in July. The pace of sales of existing homes then declined 8% from July to December 2013, according to the National Association of Realtors.

More recently, the housing market largely weathered a rise in rates that followed the November 2016 presidential election, in part because the election boosted consumer confidence in many parts of the country. Rates for a 30-year mortgage rose from about 3.5% before the election to 4.3% by the end of that year. The pace of home sales from December 2016 to May 2017 held steady.

While rates eventually retreated after the taper tantrum and the 2016 election, economists now expect them to remain at least at current levels.

Initially, the housing market often does well when mortgage rates rise. Potential buyers may hurry to complete purchases before rates rise further. Rising rates often signal underlying confidence in the broader economy, which could make some people more apt to buy.

Cody Moss, a 26-year-old mortgage banker, said the rise in rates has prompted him and his girlfriend to speed up the search for their first home.

“Now there seems to be added pressure because it is such an appreciating market as far the [prices] go and an appreciating market as far as the rates go,” he said.

The couple are looking for a one- or two-bedroom condo in the $200,000 to $300,000 range in or near the Lincoln Park area in Chicago. So far, they are only likely to pay $15 to $25 more a month based on the recent increase in mortgage rates, but Mr. Moss still worries whether rates will continue going up.

“The urgency is definitely there, but at the same token you don’t want to just purchase something willy nilly and not be satisfied with it,” he said.

Historically, there is little correlation between the level of the increases that recently have occurred with mortgage rates and declines in home prices.

“It takes a pretty big rise in mortgage rates to offset the strength in the economy that causes rates to rise,” said David Berson, chief economist at Nationwide Insurance and a former chief economist at Fannie Mae.

Economists expect renters who want to become homeowners will still try to do so, although they may have to look for cheaper homes or make other spending changes. Economists believe mortgage rates would have to rise to roughly 6% before they start to significantly affect borrowers’ decisions about whether to buy a home or what they can afford.

However, in higher-cost markets, such as New York City and San Francisco, higher rates can have a bigger effect given that loan balances are larger. A 3.5% rate on a $500,000 loan would create a monthly payment of $2,245, according to LendingTree Inc., an online loan information site. At 4.5%, the monthly payment would be $2,533. (That excludes taxes and insurance.)

Rising rates tend to have a bigger impact on the market for refinancing existing mortgages. The Mortgage Bankers Association expects mortgage-purchase originations to increase about 7% this year. It forecasts the refinancing market, which is smaller, to plunge by nearly 28%, adding to a sharp drop in 2017.

Some banks have moved in the past year to focus more on purchase mortgages than refinancings. Several said they are giving borrowers more options to lock in their rate earlier in the mortgage process.

The rising rates could be a jolt after 10 years of superlow rates—but it also represents a return to normal. “I run into quite a few people who have become mortgage professionals in the past 10 years, and that’s not the mortgage business—this is,” said Sean Grzebin, head of mortgage originations at JPMorgan Chase & Co. “It’s a different way of thinking.”

Source: WSJ