The ball seems to be rolling uphill—the river, running in reverse. Did an increase in mortgage rates really spur an increase in home sales?

Mortgage rates are increased and decreased to produce two entirely different, but incredibly predictable outcomes. When rates are increased, borrowing becomes more costly and people are discouraged from taking out the loan necessary to purchase a home. When rates are decreased, money is not only more available, but much less costly to borrow; the result—predictably—is a spike in the number of homes and condominiums purchased.

However, when rates jumped to 4.83% in the week ending December 16th from 4.61%, the number of houses purchased increased. How is this possible? Has our brave new economy reversed the effects of interest rate manipulation?

While theories of black magic and voodoo might come to mind, one possible theory does exist. To begin, we must understand where the mortgage rate has been the last 30 years; namely, that they are at a historic low and that analysts have been waiting patiently for their inevitable increase. The interest rate might not ever get back up to it’s 1980 level of 16%, but everyone “in the know” was full well aware that it could not hover where it has been for the last couple of years. That being said, this slight increase in the rate let potential homeowners and real estate agents know that it might have bottomed out; and that because this might be a sign of the rate climbing back, now—more than ever—might be a time to buy a home and get locked into a mortgage with a low interest rate.

This theory seems to be supported by the fact that before this increase people did not at all seem encouraged by the historically low rates to refinance their homes or take out a loan to purchase a new property together. That being said, this increase in the interest rate on mortgages seems to have been a wake up call to get in while “the gettin’ is good”.

Whether further increases in the rate encourages people to do so remains to be seen. However, at least for the time being we have a better idea of why home sales increased when they should have fallen.

This is filed under Home Loans/ Mortgages.

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