Predicting Rate Moves:
An Exercise in Futility

Question: I am looking to buy a house, but have decided to hold back while interest rates are rising. Is this a wise move? Will rates fall anytime soon?

-- Edith, St. Paul, Minn.

Edith: If there is one thing that is certain, it is that you can't predict interest rates. In June mortgage interest rates momentarily dipped below 5%. As of this writing, they are edging back toward 6.5%. That is a huge difference in just a few months, and it is bound to have an effect on the real-estate market. However, that effect may be different than most people realize.

For one thing, sales of existing homes actually grew. In July they hit a record annual rate of 6.1 million units, while interest rates were climbing. Of course, it could be argued that buyers were just picking up properties before interest rates went higher. If that is true, then sales in coming months could fall.

On the other hand, moving from volume to value, the rate of increase of home prices has slowed. According to the Office of Federal Housing Enterprise Oversight (the agency that watches over Fannie Mae and Freddie Mac -- the two big quasi-government secondary lenders), the national rate of housing-price increases dropped from 7% in the first quarter of this year to 5.6% in the second quarter. Remember, however, that is a decline in the rate of increase, not an actual decline in price.

There is another element to this and that is the effect that increasing interest rates have on the economy. To take just real estate as an example, consider refinancings. According to the Mortgage Bankers Association of America, its index of refinancings is off nearly 80% since May. What this means is that most of the homeowners who were refinancing to lower interest rates and pulling cash out of their homes are no longer doing so. As a result, the $170 billion in home improvements (and the $85 billion used to reduce debt) pouring into the economy by the refis is turning into a trickle.

While this money was going out, it helped buoy the economy. Now that it has stopped -- and so quickly -- it could mean rough sailing, economically, in the months ahead. And if the economy should take a dip (which most economists I read don't predict at this time), we just might see interest rates likewise fall. Indeed, several mortgage brokers with whom I have talked are hoping for a slight drop in mortgage rates by year end.

All of which is to say that, as you have discovered, home buying has become a bit of a gamble. Are we at the crest of the interest wave, or in a trough? Just remember that even 6.5% seemed mighty low to most of us only a few years ago.

-- 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).

Submit your question to realestatejournal@wsj.com, with your first name and the city where you're located, which are required to publish your question. If your question is answered and posted, we will show your first name and city.

Although we can't acknowledge all e-mail, we'll answer as many questions as possible.

Email your comments to rjeditor@dowjones.com.