Will housing slow the economic recovery?

Housing is fueling the slight surge in the economy, but maybe not for long. The Wall Street Journal reported that demand is slowing as interest rates continue to creep up, potentially harming the upswing in housing sales.

Here’s the Wall Street Journal story:

A rise in interest rates is slamming homeowners’ demand for mortgages, prompting large and midsize banks to cut jobs and warn investors of declining profitability in the home-loan business.

Wells Fargo & Co., the nation’s largest mortgage company by loan value, on Monday told investors at a conference that it expects mortgage originations to drop nearly 30% in the third quarter to roughly $80 billion, down from $112 billion in the second quarter.

J.P. Morgan Chase & Co., the largest U.S. bank as measured by assets, said during the conference sponsored by Barclays PLC that it expects to lose money on its mortgage-origination business in the second half of the year. On Aug. 29, Bank of America Corp., notified about 2,100 employees that they were being let go largely due to a decline in refinancing activity, said a bank spokesman.

Mortgage originations include loans for home purchases and refinancings.

Rates are rising on investor worries the Federal Reserve soon will take steps toward reducing an $85-billion-a-month bond-buying program designed to help stimulate the economy.

So, it’s not just consumers who could feel the pain, but the nation’s largest lenders and their shareholders as well as rates climb higher. The Chicago Tribune chronicled the rise in rates in a Sept. 5 article:

Mortgage rates moved closer to their high points for the year this week, buoyed by continued reports of a strengthening economy.

The average interest rate on a 30-year, fixed-rate loan was 4.57 percent, up from 4.51 percent last week and 3.55 percent in the same week a year ago, Freddie Mac said Thursday in its weekly survey.

The average rate on a 15-year, fixed-rate loan was 3.59 percent. That compared with 3.54 percent last week and 2.86 percent a year ago.

Among the positive economic reports credited for pushing rates higher were those of real gross domestic product and the ninth consecutive monthly increase in residential construction spending.

The run-up in rates has dampened interest in refinacing existing mortgages but when there is a slight decline in rate, homeowners are moving on them.

For instance, last week, applications to refinance existing mortgages rose 2 percent from the previous week, bringing the refinance share of applications to 61 percent, the Mortgage Bankers Association reported Wednesday. According to its own survey of mortgage rates, the average contract rate for a home loan fell to 4.73 percent, from 4.80 percent a week earlier.

But Bloomberg wrote that rising rates aren’t likely to hurt the recovery, according to comments from Wells Fargo:

Rising mortgage rates probably won’t slow the housing recovery because new families are being created and homes are still affordable, Wells Fargo & Co. (WFC) Chief Financial Officer Tim Sloan said.

“We don’t believe that the recent increases in mortgage rates are going to in any way, shape or form snuff out the housing recovery,” Sloan said today at an investor conference in New York. “When you look at any sort of statistics in the demographics in terms of household creation as well as household affordability, they are still very attractive and should drive a continued recovery in the housing business.”

The average rate on a 30-year fixed-rate mortgage has risen more than 1.2 percentage points since hitting a low of 3.35 percent in May, according to Freddie Mac data. That hasn’t slowed U.S. home prices, which rose 7.7 percent this year through June, according to an August report from the Federal Housing Finance Agency, Freddie Mac’s and Fannie Mae’s overseer.

The increase in mortgage rates has slowed refinancings, and the bank may originate about $80 billion in home loans in the third quarter, down 29 percent from the three-month period ended June 30, Sloan said. The San Francisco-based lender’s gain-on-sale margin, what it gets from selling loans to be packaged into securities and sold to investors, will fall to about 1.5 percent from 2.21 percent in the second quarter, he said.

The drop in housing means that banks are looking to cut jobs and will see less revenue from securitizing mortgage loans. As the business becomes less profitable, it’s likely that lenders will pull back making it harder for people to get loans. It’s a vicious cycle, but likely better than the one that lead to the financial collapse.