June '18 Market Watch

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Real Estate

June, 2018

 

Interest Rates On The Rise: What Does It Mean To Housing Demand

 

    Interest rates for mortgages are rising. And with the economy showing continued strength and unemployment  approaching historic numbers, rates are projected to increase throughout the reminder of this year, topping near 5% by year end.

    So, what does it mean to housing demand. Well, if you ask several followers of the housing market, the consensus is it will, perhaps surprisingly, have little effect on demand and a positive impact on prices. Three quotes emphasize this theory.

    Mark Fleming, First American’s Chief Economist stated, “Understanding the resiliency of the housing market in a rising mortgage rate environment puts the likely rise in mortgage rates into perspective. They are unlikely, unlikely, to materially impact the housing market. Mortgage rates are on the rise because of a strong economy, and our housing market is well positioned to adapt.”

    Terry Loebs, founder of Pulsenomics said “Constrained home supply, persistent demand, very low unemployment and steady economic growth have given a jolt to the near-term outlook for U.S housing prices. These conditions are overshadowing concerns that mortgage rate increase expected this year might quash the appetite of prospective homebuyers.”

    And lastly, the Urban Land Institute chimed in with “Higher interest rates are generally positive for home prices, despite decreasing affordability. There were only three periods of prolonged higher rates: in 1994, 2000 and the Taper Tantrum in 2013. In each period home price appreciation was robust.”

    The chart (from Keeping Current Matters, a research firm specializing in the housing market) illustrates this point. It shows the impact on home prices the last six times mortgage rates increased more than 1%, similar to its current projected path. As shown, the last six times interest rates increased by at least 1%, prices also increased, and in three cases by double digits.

    This trend is predicted to carry this time as well with demand exceeding supply. And it may worsen if prospective sellers decide to stay put in their current home versus moving and having a new mortgage at a higher rate. So with demand for housing high and the supply of homes low (Bridgewater supply is only 3.46 months), demand should continue to push prices higher for the next few yearsinterestrates