Sunday, August 14, 2005

Why rates haven't sunk the market yet

A story today from the Associated Press (via CBC)
Rising interest rates are supposed to be an economic sedative, but the hyperactive U.S. real estate market has retained its vigour even as the prime lending rate has climbed to a nearly four-year high.

One of the biggest reasons for real estate's unusual behaviour is that home mortgages are less expensive than they were 14 years ago when the Federal Reserve Board began to push up the short-term cost to borrow money.

That inflation-fighting effort has raised the prime rate from four per cent in June 2004 to 6.5 percent today, making it more costly to buy cars, appliances and almost anything else on credit.

Meanwhile, home mortgages have remained a relative bargain. The average rate for a 30-year fixed-rate mortgage stood at 6.05 percent through Thursday, down from 6.41 percent during the first week of June 2004, according to HSH Associates, an industry research firm.

Those low financing costs mean home buyers can qualify for larger loans - a major factor why real estate prices have continued their steady ascent in neighbourhoods scattered across the country.