Do Rising Rates
Indicate the End?

Question: I am buying a home and the purchase is contingent on the sale of my existing house. Things looked rosy until interest rates went up recently. Now my ability to qualify for the mortgage I will need on my new home is questionable. I also haven't found a buyer for my current house. My agent says buyers are staying away because interest rates are rising. Is this true? Am I the last person to try to buy during the real-estate "bubble"?

-- Candy, Sacramento, Calif.

Candy: All those people who have been worried about the so-called real-estate bubble saw the recent turnaround in interest rates as a deadly omen. They know that real estate is interest-rate sensitive and they fear a turnaround in interest rates will also mean a turnaround in the market.

Their fears, however, may be largely unwarranted. On one hand, it is true that every time interest rates fall, more people can qualify for bigger mortgages, making it easier for them to purchase homes and, thus, boosting the market. And every time rates go up, fewer people can qualify for the same mortgages, slowing the market. This is the problem you are facing.

On the other hand, it is important to maintain perspective. At 5.5%, mortgage rates are still near 40-year lows. And at this time last year, interest rates were above 6.5% -- and real estate was booming.

What we have seen recently is an extra boost to the market driven by incredibly low rates in the 5% range. We aren't likely to see these rates again in our lifetime, unless the economy falters even more. On the other hand, should the economy rally, we could see interest rates go higher. However, most economists are predicting a bumpy bottom to the recession, rather than a robust recovery.

As far as the rise in interest rates chasing away buyers, I am afraid usually it is just the other way round. As interest rates begin to rise, those who were sitting on the sidelines jump in hoping to take advantage of the still-low rates before they rise even further. Thus, at least in the short term, rising rates often create more home sales.

The real peril from increasing mortgage interest rates is for refinancings, which could come to a screeching halt. All those families that refinanced (often multiple times) as rates fell and used that money to pay down debt, buy cars and appliances and other items will no longer be able to do this. And they will no longer have additional funds to spend. This could have a serious dampening effect on the economy. Thus, higher interest rates could throw us into a double-dip recession.

My guess is that interest rates will have to get at least two percentage points above the bottom (to about 7%) before the real-estate market will seriously deteriorate in most areas of the country. In your state, there actually is a housing shortage, which should prop up the market and help insulate it against short-term price drops.

All of this indicates that you should hang in there. There may be reasons other than interest rates that you can't sell your current home (appearance, location, price). On the other hand, it might just sell this weekend. And the Federal Reserve seems to be working hard to keep rates low, having reduced short-term rates another one-quarter of a point only a few weeks ago. Who knows, maybe mortgage rates will dip again and you will find it easier to qualify for that mortgage you need on your new home.

-- Mr. Irwin has more than 25 years' experience as a Los Angeles-area real-estate broker. He is the author of more than two dozen books about real estate and is recognized as one of the most knowledgeable writers in the real-estate field. Mr. Irwin's most recent books are "How to Get Started in Real Estate Investing" and "How to Buy a Home When You Can't Afford It" (McGraw-Hill, 2002).

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