Rising Mortgage Rates May Deflate Home Sale Contracts

Not five minutes after reporting an unexpected 10 percent jump in the Realtors' Pending Home Sales Index, I starting to hear rumblings of concern over whether many of those contracts signed in October would result in actual closings.

Why? Mortgage rates.

This index is based on what people thought they could afford when they signed the deal in October. Things have changed.

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The average rate on the 30-year fixed mortgage fell to 4.21 percent in early October, according to the Mortgage Bankers Association. Last week it was up to 4.56 percent, and with the yield on the 10-year Treasury up over 3 percent (which mortgage rates track), the expectation is rates will go even higher.

"Based on the average spread this year, the average 30-year mortgage rate is likely headed to 4.75 percent over the next week," notes Peter Boockvar over at Miller Tabak. It was 4.66 percent last night, according to Bankrate.com

While some home buyers lock in a mortgage rate before signing a contract, many go mortgage shopping after they sign the deal. Buyers who thought they were getting around 4.25 percent in October may be hit with sticker shock when they realize what they can actually get. We've seen applications to refi plummet over that past two weeks, down 22 percent just last week, as rates rise. Purchase applications are still in the positive, but just barely, and you would think they would have shot up recently, given the jump in signed contracts.

Today's home buyer is really in a tough spot because home prices are arguably low, and mortgage rates, while rising, are still historically below average.

But buyers worry home values will continue to fall after they buy, and some argue that homes are not actually as affordable as you might think.


Take this note from analysts at Morgan Stanley this month:

"Housing is still unaffordable. While traditional measures of housing affordability are near record levels in some cases, we believe that once adjusted for the lending environment and potential buyer qualifications, housing is in fact still unaffordable. Mortgage rates have come down, but the required down payment has gone way up, and the resulting purchasing power has suffered more than the decline in home prices to date. In addition, required credit scores have increased, and marginal lending has virtually disappeared. From this perspective, the actual supply of credit remains tight."

All you have to do is look at the historically high level of all-cash buyers (over 20 percent) in today's market to prove that point. With buyers having to put more money down to get the best rate, even small increases in mortgage rates will affect final sales. It will be interesting to see in December and January if this surge in signed contracts really translates into a surge in existing home sales.

Questions? Comments? RealtyCheck@cnbc.comAnd follow me on Twitter @Diana_Olick