Sales of new and existing home are gaining momentum: More supply is coming to market and prices continue to rise. On the latter, the S&P/Case-Shiller Home Price Index shows prices up 1.7% in its 20-city index month over month; the year-over-year rate is exceptionally strong, at plus 12%.

But will rising mortgage rates derail the recovery?

We don't think so. Many people have the perception that rising mortgage rates lead to lower (or at least less growth) in home prices. The rationale goes that rising mortgage rates lower affordability, so home prices fall to compensate for higher financing costs.

The perception was recently refuted in the New York Times. Douglas Duncan, chief economist at Fannie Mae was quoted to say, “There’s no strong correlation between interest rates and home prices.”

Mortgage rates rose sharply in the late 1970s, but home prices continued to rise too. In the 1990s, rates were relatively flat and home prices continued to move higher. In 2007 and 2008, both mortgages rates and home prices fell. In 2013, rates have increased and so, too, have home prices. In other words, there really isn't much of a correlation.

To be sure, mortgage rates matter, but they're less important than many people believe. Job and economic growth are by far the more important variables, and both have been improving in recent months.

Courtesy of Jessica Regan.

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