The mortgage rate honeymoon seems to be drawing to a close, and since consumers have gotten used to sub–6 percent fixed mortgage rates over the past two and a half years, there are now plenty of questions about the immediate future of the housing market. With high energy costs, steady consumer spending, solid GDP growth, and constant short-term rate hikes by the Federal Reserve, mortgage rates have finally started to trend upward. And unlike the occasional jumps that have happened in recent years, this time they are not likely to come back down. The spread between one-year adjustable rates and the 30-year fixed rate has continued to narrow, and, like a compressing spring, it will eventually push apart again, sending 30-year rates upward.

So where exactly are mortgage rates headed? According to the office of the chief economist at Freddie Mac, the 30-year mortgage rate will average 6.4 percent in 2006 and 6.6 percent in 2007. That means for the next year we should see only very gradual increases in mortgage rates—important news for the housing market. While the pace of home sales and price appreciation will slow, gradually rising mortgage rates will mean a more forgiving marketplace, providing more time for home buyers to adjust to changing conditions. In terms of affordability, the rise in mortgage rates will be partially offset by continued economic growth and job growth, and overall should result in a “soft landing” for most housing markets across the country.

But wait, what about “the bubble”? Talk of a housing bubble has been a staple of housing market commentary for almost as long as we've enjoyed the sub–6 percent mortgage rates. The reality is that there still is no housing market bubble at the national level. Economists often try to apply the lessons learned during the tech boom/bust to today's real estate market, and the exercise has not proven to be particularly valid. Housing (or, more specifically, land) is not only real property but is an inherently scarce local commodity and has a much more stable marketplace than the speculative technology stocks of the late '90s. And because housing is a local commodity, any rises or declines are more often going to occur as a result of local trends and not as much on a national basis, especially with a solid national economy.

While some short-term fluctuations are to be expected, the long term remains bright. In the next few years, construction activity will find a new equilibrium that is below recent peak levels but still a high plateau compared to the preceding decades. And as time goes on, the task becomes even more monumental. According to the Brookings Institution, by the year 2030 almost half of the buildings in which Americans live, work, and shop will have been built after 2000. For builders and the companies that supply them, that means there's precious little time to worry about temporary market adjustments. —Jonathan Dienhart heads the published research group for Hanley Wood Market Intelligence, a division of PROSALES' parent company, Hanley Wood, LLC.

Hanley Wood Market Intelligence provides data and consulting services on residential real estate development and new-home construction, including analysis of key trends impacting the housing market through its proprietary software products and research reports. Contact: 800.639.3777.

Mortgage Rates