Since the housing collapse 10 years ago, the U.S Federal Reserve has maintained a loose monetary policy, keeping interest rates low and providing easy access to credit.
But with the economy nearing full employment and corporate America raking in record profits, the Fed’s policy is tightening. After years of a fixed 30-year mortgage interest rate below 4 percent, that rate is now 4.5 percent. Anxiety over rising interest rates was one of the factors that caused the recent stock market swings, and it’s only a matter of time before rising rates seep into the housing market.
For prospective homebuyers, rising rates might put some pressure on finding a home sooner than later, as rates are unlikely to get better than they are now. According to a recent survey by Redfin, 21 percent of respondents said rates passing 5 percent would increase the urgency to buy a home, 27 percent said they’d slow their search to see if rates come back down, and just 6 percent said they’d cancel their search for a home altogether because of rising rates.
A sense of urgency would be justified because the lower the rate a homebuyer can lock into, the easier it’ll be to make a monthly payment. For a homeowner with a variable-rate mortgage, rising rates would lead to suddenly higher mortgage payments.
CoreLogic built a model to project what a typical monthly mortgage payment would be if the rates rose by 0.85 percentage points over the next year, which it calculated by averaging multiple rate increase forecasts, including from Freddie Mac, Fannie Mae, and the Mortgage Bankers Association.
The model assumes a 2.6 percent rise in real home prices. Taking this into account, the typical monthly mortgage payment would rise from $804 to $910, a 13.3 percent increase. However, when the projection is adjusted for inflation, it’s still 36.4 percent below the all-time high of $1,263 set in June 2006.
And for further context of the rate itself, even a dramatic rate increase wouldn’t put it near all-time highs. It’s hard to imagine now, but in the early 1980s, the fixed 30-year mortgage rate was about 18 percent. By the 1990s, it fell to about 10 percent and has steadily fallen ever since.
How a rate hike will affect home values and the market as a whole is murkier. The tax bill passed in December has numerous implications for housing that may not be fully realized for years to come. A new cap on the mortgage interest deduction and the new cap on state and local property tax deductions mean home prices in expensive coastal markets could see home prices fall, although not necessarily making them more affordable.
Accurately assessing the impact of a margin rate hike at time when multiple changes are playing out is difficult. But for what it’s worth, CoreLogic doesn’t see much of a correlation between mortgage rates and home prices and sales.
“If you look at the relationship between [mortgage] rates and [home] sales and home prices, the relationship is almost zero,” said Sam Khater, deputy chief economist at CoreLogic. “That’s shocking to most people. Even real estate people and finance people, they don’t understand that.”