Will Rising Mortgage Rates Kill the Housing Market?

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As of March 2018, mortgage rates have been steadily on the rise for at least the past two months. The Federal Reserve has increased its benchmark interest rates again. While this increase does not always trigger higher mortgage rates automatically, there is little question that rates are quite a bit higher than the beginning of the year.

According to Zillow, the 30 year fixed rate mortgage interest rate is in the 4.4% and 4.5% range. In January, there were rates available in the high 3’s and low 4’s. According to some experts, we may see rates as high as 5% in the next year. Some experts contend that the rise in rates for 30 year mortgages is especially worrisome for first time home buyers. They are usually the most sensitive to rates and prices.

The big questions for many in the industry, as well as potential home buyers, is, will the rising rates kill the housing market?

For a possible answer, let’s look at a recent housing market study conducted by industry consulting company John Burns. The study surveyed more than 300 homebuilders and found in February 2018 that 85% of them said home sales would drop less than 10% if rates went up to 5%.

For results on this study, John Burns asked the home builders how much would their home sales be affected if rates went up 1% and held there for the rest of the year, if the economy stayed about the same.

About 30% said sales would not drop at all. But 56% of those who responded said rising rates would reduce their sales by 1 to 10 percent. Just 2 percent said rising mortgage rates to 5% would affect their sales by 20 to 30 percent.

The company stated that mortgage rates have gone up one percent or more 10 times since the 1970s. In those events, there was little impact on home sales and home prices – if the underlying economy was strong. Generally, the study’s conclusions stated that when there is rising consumer confidence, strong job growth, and higher wages, they offset the lower demand from higher rates. That said, when rates go up in a weak economy, home sales tend to plummet.

The economic outlook has looked fairly strong this year. Unemployment is in the range of 4%, while GDP growth was almost 3% last quarter. Some believe that as the Trump tax cuts kick in this year, we will see growth above 3%. If that is the case, it is reasonable to think that rates will not have too much of an effect on home sales and prices. But there is a difference in opinion among people who own homes and those trying to buy them. The recent growth in home prices, as well as higher rates and lower inventory of affordable, middle class housing stock, have made affordability more of a concern for many buyers.

A survey by ValueInsured found that confidence for first time home buyers in their ability to save for a down payment was on the down swing, with 35% saying they could afford to make a down payment. That was a 9 point drop in a year. In the hottest housing markets in the US, just 25% of possible home buyers were somewhat sure they could afford a down payment in the next year.

Home owners in that survey stated that 60% of them thought people in their areas were paying too much for a home, while 30% thought the housing market was unhealthy.

Another survey in late March 2018 confirmed the belief that higher rates in a good economy do not have a major effect on people applying for mortgages. Even with rates for 30 year notes up to 4.6%, applications for mortgages in late March 2018 were up almost 5%, according to the Mortgage Bankers Association. Volume was little changed from a year ago.

Redfin’s chief economist stated to CNBC that homebuyers were less concerned with interest rates, and were more worried about the shortage of affordable homes in many markets. In February, there was a 12% decline in the total number of homes for sale. This was the 29th month in a row for year over year supply declines. A Redfin survey found that only 6% of potential buyers would be put off if interest rates were above 5%.

It is also important to remember that even with rates higher than they have been in years, they are still historically very low. Over the last five decades, rates have averaged around 8% for a 30 year loan. Rates are still under 5%, so this is really very reasonable. As long as the economy continues to move forward, the general consensus is the housing market will continue to roll on.

References: http://dsnews.com/daily-dose/03-06-2018/will-rising-rates-really-impact-housing-market and https://www.cnbc.com/2018/03/28/weekly-mortgage-applications-rise-even-as-rates-increase.html


One thought on “Will Rising Mortgage Rates Kill the Housing Market?

  1. Customwritings

    That”s because as per usual the BOE has everything upside down and back to front. Take a look the real data does not lie pick a graph any graph you like after 6 US rate hikes. Rate hikes do not make a currency stronger or fight inflation because all else equal rate hikes are a) Price hikes right across the board as the increased costs gets passed on b) A fiscal stimulas due to the interest income channels Interest on Treasury Securities, $127.1 bln, up $11.5 bln, growing at 10% y-o-y. This is the fastest growing spending item and one of the largest. It shows you how rate hikes equate to fiscal expansions. Interest on Treasury securities was the largest single line item of government expenditure during Reagan’s first term, which became known as the Reagan “boom.” Spending on interest even surpassed spending on the military. Rates were 20% back then so you can see why. Rate hikes also increase bank deposits. Bank deposits rose by $25.4 bln to $11.993 trillion. Pick a graph any graph the $ has weakened since they started hiking and infation is on the rise.

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