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I'm visiting family in Seattle, Wash., an annual trip I make this time of year. Real estate data and stories from family and friends confirm that something changed here in the last two months. The already recovering real estate market -- with limited home supply -- has been on steroids. The Northwest Multiple Listing Service reported a 15.3% annual sales price increase in King County (this is where Seattle is located) in May. And in June, prices rose another 2.4%.

Average home prices here are $427,000, just 6% below the 2007 peak. And there is pent-up demand for homes -- nearly 50% of homes are under contract within two weeks of being listed. My brother-in-law just lost a bidding war on a home in Mount Washington, a city of 31,000 people located 61 miles north of Seattle in the fertile Skagit Valley. The 3,100 square foot home sold for just over $400,000 back in early 2007. After being foreclosed, the house listed three months ago at $260,000 and saw no offers. Yet just last week, he bid $240,000 and was one of three offers for this home in the same week. Someone willing to pay 100% of the asking price outbid him. He's been home hunting for months, and has found limited inventory of homes in the area.

Meanwhile, my mother-in-law is also home shopping. She expects to sell her current three-bedroom bungalow in the Seattle suburbs for $350,000. That's well above her purchase price, and about $30,000 below the "peak" value. She hopes to downsize into a smaller home now that she's retired. She recently bid on a foreclosed home. The credit union that owns the home has been sitting on it, and it's been uninhabited for two years. Last week it was put on the market with a $255,000 asking price. She and three others submitted bids. Hers was about $20K below asking price. The winning bid was again at asking price, and the buyer agreed to purchase the house "as is."

These are just two stories. But apparently the Washington real estate market has been on fire. The reason? I speculate that rising interest rates are the cause.

In May, Fed Chairman Ben Bernanke hinted that QE3 would be scaled back. That news sent the yield on the 10-year Treasury up by 50%. The move isn't only impacting bond owners (who lose money as rates rise). Mortgage interest rates are also rising. The interest rate on a 30-year fixed mortgage rose from 3.3% to 4.5% in just two months -- a 36% increase.

For the average homebuyer here in King County, the cost of home ownership increased by $235 per month. That's based just on the additional interest expense, and doesn't reflect higher home prices. Over the term of the mortgage, that adds up to an extra $84,600.

As I've said before, I want the Fed to raise interest rates. And I think that it will, as the U.S. economy continues to recover. Normally, you might expect rising rates to cool off the housing market. After all, the higher the mortgage rate, the higher your monthly payment.

Many prospective homebuyers have been sitting on the sidelines, thinking that 0% interest rates and 3.5% mortgages would be here forever. This belief provided no encouragement to "act now" and buy a home. However, with mortgage rates rising quickly and considerably -- even without any increase in the Federal funds rate -- new buyers are now flooding the market. Some of these people are first-time homebuyers. Others are buying a vacation home. And some are investing, buying up rental properties like the 7% townhouse.

With that 0% interest rate party coming to an end, the rush to lock in low rates is pushing more homebuyers into the market. The recovery in the greater Seattle area is more robust than most areas. But I suspect that similar activity is happening across the country. In the meantime, homeowners should celebrate their growing wealth.

Disclosure: None.

Source: Are Interest Rates Killing The Housing Recovery?