Mortgage Rates Hit Two-Year High

We know more than a few people who are smacking themselves on the forehead these days, frustrated they didn't take advantage of the mortgage rates that prevailed two months and 75-basis points ago.

Frustration stems from holding out for another 25-basis point drop. You may know it by the popular idiom “penny wise, pound foolish:” Hope to save 25-basis points, but loose 75-basis points in the process.

Of course, no one knows with certainty where mortgage rates are heading, but whenever a market has been in a sustained trend, and mortgage rates were in a sustained downward trend for years, the probability grows that each successive day will bring a reversal of that trend. (Economists refer to this phenomenon as Minsky's “Financial Instability Hypothesis.”)

To be sure, mortgage lending rates are higher, but not unreasonably so. Today's rates still remain attractive from a historical perspective.

The good news is that there have been a few positives associated with rising rates. Though they have slowed refinance activity considerably, they have prompted more homebuyers into action, for fear rates could go higher still. We're not surprised; we've noted many times in the past that anticipation rules people's actions.

With all the focus on mortgage rates over the past few weeks, it's worth noting that the housing market nationally is as healthy as it has been in years.

CoreLogic's latest data on distressed properties reveal just how healthier the market has become. The inventory of properties in a state of foreclosure fell 29% year over year in May, which means fewer than 2.3 million mortgages – or 5.6% of home loans – remain seriously delinquent. This is the lowest level since December 2008.

At the same time, Lender Processing Services data show the number of borrowers who remain underwater fell 47% from the first quarter of 2012 to the first quarter of 2013, which means the percentage of underwater borrowers has dropped to 14.7% of all active loans. This, too, is a multi-year low.

Rising home prices and rising consumer demand for homes will continue to reduce distressed inventory and lift more homeowners into positive equity. When stronger job growth is factored in, we're looking at a very healthy outlook for both existing- and new-home sales over the next 12 months.

With that said, many pundits remain focused on rising mortgage rates, but we believe unduly so. As long as the economy continues to improve and create jobs, the housing market will continue to improve regardless if rates rise.

We were in the minority a year ago when we said mortgage rates were no longer the key variable in the recovery. It appears we were right on that account.

 Courtesy of Jessica Regan.

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