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POINT-COUNTERPOINT E conomists and industry analysts have concluded and declared without hesitation: "The party's over." That party they're referring to is the record-low-interest-rate bash of the past couple of years that has helped to keep housing affordability extremely high, even in the face of rising home prices, and helped millions of homeowners refinance mortgages originated in the 6.5 percent-plus boom days to secure lower, more sustainable monthly payments. market avoid veering into bubble territory. Rising rates will put homeownership out of reach for some consumers, but the strengthening economy and the possibility of easier mortgage credit could keep some discouraged homebuyers in the game. Though rate increases tempered toward the end of July, the impact is already clearly evident in declining refi volumes. Industry data show refinance applications down some 40 percent compared to last year, and recent studies indicate consumers fear they're in danger of missing out on the market's lower borrowing costs. The future behavior of mortgage rates depends largely on what action the Federal Reserve takes—or refrains from taking—in connection with its bondbuying program. Whichever route the central bank follows, will its choice carry enough weight to disrupt the housing market? Trulia's chief economist Jed Kolko says rising rates are giving would-be homebuyers the jitters, but when taken in the context of other market dynamics, Kolko contends the upward trajectory won't throw the housing recovery off track. In fact, John Burns, who leads a team of experienced advisors at the independent research and consulting firm that bears his name, says rising rates are exactly what the current booming market needs to reel itself in from flirting with another bubble-bust cycle. Here's what these two housing authorities had to say on the subject. We are happy to see rising mortgage rates because we believe a stable housing market is a better long-term goal than a booming and busting market, and the housing market has been booming, evidenced by several market indicators at play: Appreciation rates have skyrocketed. We have a lot of home price appreciation going on, and if the Fed keeps rates where they are, we are going to see a lot more. New home prices have risen about 20 percent in the San Francisco Bay Area in the last year, and finished lot prices are at all-time highs in good locations in Phoenix, Orlando, and all four major markets in Texas. Wall Street is so optimistic about future home price appreciation that some homebuilder stocks are back to their 2005 levels, almost every stock sector remotely tied to housing is up 100 percent from two years ago, and there have been three homebuilder IPOs and four additional IPO announcements already this year, which is more than the last 20 years combined. Investors are flipping homes again. Home price appreciation is such an obvious bet at this point that everybody is piling in. We are seeing mom and pop investors, and we're seeing flippers now in the market . . . . You only need to own the home for a couple of months to make a profit. Early on, it was Arizona, then it was California and Nevada, now it's Atlanta and Florida, and the next game is the Midwest. Fed stimulus has tremendous impact, but no bubble … yet. Three-and-a-half to 4 percent [benchmark] interest rates will cause rising home prices everywhere, and then at some point, affordability is going to get out of whack . . . . I don't think we are in a housing bubble yet because prices are not out of line in relation to incomes, but I think it is time to start the conversation to make sure we don't end up in another one. I realize that rising mortgage rates aren't the best scenario for everyone, but slowing the acceleration in the housing market is in the best long-term interest of the country because it is really difficult to avoid overshooting to the upside. Also, can you really complain about a 4.5 percent mortgage rate? According to Jed Kolko: Rising mortgage rates are making consumers nervous and discouraged. Higher rates make housing less affordable and should help slow home price gains from a rapid boil to a gentler simmer. But so far, the effect of rising rates on the housing market—aside from the drop in refinancing—has been limited and is unlikely to derail the housing recovery. Why? Four reasons: Mortgage rates are rising alongside a strengthening economy, boosting housing demand. By themselves, rising rates make housing more expensive and hurt housing demand. But rates aren't rising in a vacuum. After a severe recession, economic recovery tends to push interest rates higher as demand for credit increases and investors worry more about inflation. Furthermore, the Fed has tied its plans to taper bond-buying to signal that the economy is getting stronger. Therefore, by design, the strengthening economy should boost housing demand at the same time that rising rates dampen housing demand. 66 Inventory remains tight, making it hard for homebuyers to rush their purchase. Even though the number of homes for sale has recently started to increase, inventory remains tight. That means buyers who want to find and buy a home quickly to beat rising rates might be held back by slim pickings. In fact, among survey respondents who actually plan to buy a home within the next year, not being able to find a home they like edges out rising mortgage rates as their No. 1 worry. Rising rates could lead to expanded mortgage credit. Mortgage rates matter—but only if you can get a mortgage in the first place. Although credit might be starting to open up for the most qualified buyers, credit remains tight. But rising rates could have a silver lining: As refinancing demand dries up, banks might look to expand their homepurchase lending instead. When rates were at their low point last fall, refinancing accounted for more than 80 percent of mortgage applications, so the recent drop in refinancing leaves a big hole in banks' mortgage business that home-purchase loans could fill. Even though consumers are anxious about rising rates, we bet they'd rather have a 5 percent loan that they can actually get than a 3.5 percent loan they can't get. Buying is still a lot cheaper than renting. There's no question that rising rates make homebuying more expensive than it was a few months ago. But we can't turn back time: The choice is not to buy now or six months ago. Rather, the choice that many consumers face is whether to buy or rent today at current prices, rents, and mortgage rates. Right now, that math still makes buying look like the better deal—by far. Even with a 4.5 percent 30-year-fixed mortgage, buying is 37 percent cheaper than renting nationally; that's because a 4.5 percent rate is still very low by historical standards, and prices are still modest relative to rents. Nationally, renting doesn't get cheaper than buying until rates reach 10.5 percent, though the tipping point is below 6 percent in the Bay Area and Honolulu. Overall, rising mortgage rates will help slow down recent home price gains and should help the According to John Burns:

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