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US mortgage rates tick downward again: Good news for home prices?

US mortgage rates, still historically low, are sustaining progress in the housing market and giving the US economy a needed boost. But when rates rise – or Fed policy shifts – home prices can take a hit.

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The “real” price of homes (in inflation-adjusted dollars) sagged some 7 percent during that period. That’s not a huge plunge, but this era of high interest rates and inflation seemed to have long-lasting effects: It was 1987 before the real home prices, as tracked by economist Robert Shiller of Yale University, got back to their 1978 level.

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In 1994, the rate on a 30-year loan jumped from 7.07 percent in January to 9.20 percent in December.

Like today, the economy then was in the early phases of recovery from a recession. Home prices weren’t rising much before 1994. With the overall economy improving, the 1994 rate jump didn’t trigger a notable home price decline, but real home prices stayed pretty flat for about three years, even though mortgage rates started easing downward again.

In both these episodes, the Federal Reserve was in a “tightening” mode on monetary policy – raising short-term interest rates. During first period, in particular, the Fed was battling runaway inflation until the economy fell into a deep recession in 1981.

Today, the rise in interest rates has more to do with expectations than action by the Fed. A rise in so-called taper talk by Fed officials has spawned worry about a potential shift in monetary policy.

The concern is that the central bank will soon start to taper the pace of a bond-buying program aimed at lowering long-term interest rates and spurring economic growth. Fed Chairman Ben Bernanke has tried to take the edge off these fears, by saying that the Fed’s policy will still be very “accommodative,” with ultra-low short-term interest rates, until the unemployment rate has fallen substantially.

The moral of this history lesson: Mortgage rates aren’t the only thing that drives house prices, but rates are worth paying attention to.

Home values are also influenced importantly by a range of factors, from trends in the job market and incomes to things like the supply of homes for sale and whether banks are being easy or tight in approving loans.

An advantage of buying a home, even at a time when the general trend in rates may be upward, is locking in a relatively low rate.

A risk, judging by history, is that rising mortgage rates sometimes contribute to a climate in which home price gains are hard to come by for a while.

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