Mortgage Rates Rise Again, But Won't Spoil The Housing Recovery

Freddie Mac said the average 30-year fixed mortgage rate rose to 4.51% last week, from 4.29%, but while that might worry some buyers looking for a home, it can actually be viewed as an important positive signal.

"Increases in rates would not be occurring if there wasn’t economic growth, says Steve Blitz chief economist at ITG Investment Research. "If people thought the economy was heading south, even with absence of quantitative easing, the rates wouldn't rise."

While a quick backup in mortgage rates sparks concerns, remember that rates are still at historic lows. In fact, for every $100,000 in a loan, an increase of 100 basis points only adds $50 to each monthly payment.

"If that makes a difference, you probably can’t afford the home," says Blitz.

While a slow and steady rise in mortgage rates isn't expected to stifle demand for housing, the environment makes it less attractive for existing home owners to refinance to lower rates. Over the last several quarters, banks have benefited from the uptick in refinances, but the closing and bank charges that accompany a refinancing may not offer consumers much of a reason to refinance.

Although regional banks such as US Bancorp , Zions Bancorporation and  Fifth Third Bancorp could feel the pinch from lower refinancing volume, Blitz doesn't see this as a major concern: "New mortgages, as opposed to refinancing, could grow a lot faster and offset any loss in the refinancing business," he says.

Plus, the steepening 10-year Treasury curve over the past month gives banks an even greater incentive to lend money. "This results in more profit on the loans, which is a very powerful force for bank earnings."

Aside from banks, home builders are on the receiving end of the housing market rebound, even though stock prices have been choppy.

"Buyers have higher than average down payments and credit scores, so the rising rates are not having much of an effect as the volatility in the home builders' stock prices suggest," says Sterne Agee analyst Jay McCanless.

Plus, the major builders like Lennar and PulteGroup are expected to build roughly 20,000 homes this year and have a leg up on smaller private companies that have more limited access to capital.

While mortgage rates are expected to continue to rise, especially with the Federal Reserve set to shrink its bond purchasing program later this year, home builders like PulteGroup, Ryland Group, Meritage Homes and DR Horton are positioned to perform well in the new mortgage rate landscape.

"These builders specialize in a mix of entry level buyers and move-up buyers, with a heavier emphasis on the latter," McCanless tells Forbes. "If I’m in a home now, not underwater and want to sell and purchase a new home, I’m bringing more equity to the closing table and can more easily qualify for a mortgage."

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