How Will Higher Mortgage Rates Affect the Housing Market Recovery

According to a new report from Fannie Mae, If history is any indication, the recent spike in mortgage rates is likely to have little to no impact on home prices.

According to the report, historical data suggests that interest rate increases at the level recently witnessed will not stop the current housing recovery.

The study compared historic mortgage rates with home price and sales data and focused on two time periods in which rates soared. The first, from October 1993 through December 1994, when rates rose from 6.8% to 9.2% and the second from October 1998 to May 2000 when they climbed from 6.7% to 8.5%.

During the rate spike in the early 1990s, home prices leveled off, then fell only slightly. During the second rate climb, there was no impact on homes prices at all.

What is observed through the ups and downs of rate changes is that sellers are reluctant to lower prices. Homebuyers were also willing to find ways to stretch their resources, often by switching to adjustable rate loans, which kept payments affordable for the first few years then were adjusted higher.

In addition, rates and home prices both track economic trends. So when the economy is hot, rates rise along with hiring and incomes, which means more people are able to buy homes and pay higher prices for them.

Fannie’s research is likely to mimic what will happen to the housing market in the months ahead, however, some housing experts are skeptical.

With rates for 30-year mortgages spiking by more than a percentage point to 4.51% since early May, some economists say rates will most definitely have an impact on home prices and, ultimately, the housing market’s recovery.

Mark Zandi, chief economist for Moody’s Analytics, examined more than 20 years of mortgage rate and home price data and found that, on average, for every percentage point increase in mortgage rates, the pace at which home prices grew was lowered by half a percentage point.

According to Zandi, “If sustained, the current rate rise will take some of the steam out of the market.”

However, he noted that current rates are still quite low and mortgages still very affordable compared with the historical average of more than 6%. “Buyers can live with 4.5% rates,” he said.

Jay Brinkmann, chief economist for the Mortgage Bankers Association, said the recent rate increases will have a bigger impact on how much buyers will be willing to spend on a home.

People buy homes for personal reasons, they need more room, they relocate for work, they fall in love with a house. Rate hikes usually don’t stop them from buying. It impacts which house they buy, not whether they buy a house or not. In the case of rising mortgage interest rates, instead of a five bedroom, buyers will choose a four-bedroom house. Or they’ll purchase in a less expensive neighborhood. Either way, it should result in lowering median price — not sales volume.

Lawrence Yun, the chief economist for the National Association of Realtors, disagrees: He believes mortgage rates will indeed impact sales volume and that home prices will ultimately follow.

“The dynamics of the housing market is that it affects home sales first and then inventory increases,” and when supplies go up, prices must go down.

If you, or someone you know is considering Buying or Selling a Home in Columbus, Ohio please contact The Opland Group. We offer professional real estate advice and look forward to helping you achieve your real estate goals!

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