A lot of homeowners are understandably worried that rising rates on mortgages will dampen their home\’s value, or make it more difficult to fetch an increased asking price, but that theory has been debunked several times.
I recently wrote about how exactly the ~50 basis point begin rates (now closer to 75 bps) was the equivalent of a $16,400 home price increase for prospective buyers.
On the top, this tells us that home values are more expensive, even if they stay flat, that will actually reduce demand and create a drop in prices.
History Tells another Story
But that\’s not what history indicates us. Instead, home prices go on to rise in spite of rising mortgage rates, generally because of a more robust economy.
A video interview of Fannie Mae Chief Economist Doug Duncan with National Mortgage News explains that.
Duncan explains that in the 1970s, when loan rates climbed into the teens (12%-14%), home \”actually rose, but the number of homes sold fell dramatically.\”
He adds the \”core relationship is between the level of activity and interest rates.\”
Another example he cites would be the taper tantrum that occurred during the second half of 2013, which triggered a 110-basis point mortgage rate rise throughout a six-month period. It led to a 10% decline in home based sales in the first half 2014, but home prices still increased.
In short, a developing economy generally means bigger paychecks for consumers, so they\’re able to expand their purchasing power despite higher rates and home prices. Higher income offsets higher housing costs.
There\’s also positive sentiment if your economy is humming along that leads to continued home buying at higher prices.
The confusion here is commonly with sales volume versus sales price. When increasing rise, sales volume slows. Basically, fewer homes are sold, but home don\’t drop.
And at the moment, product sales hasn\’t even slowed, this in accordance with a report today from Zillow.
The company said purchase mortgage requests on its website maintained their pre-election levels, inspite of the largest weekly mortgage rate increase since 2013.
That\’s pretty impressive, though it could have something to do with panic buying. We would need a longer timeline to ascertain if the trend holds up.
They added that refinance requests on the site were down a whopping 32% compared to early November, which is no real shock seeing that they\’re without a doubt more rate-sensitive than purchases.
Zillow said a typical 30-year fixed conforming mortgage rate increased 55 basis points (0.55%) because the presidential election to 3.91%, its highest level since early 2015.
Rate Jump Doesn\’t Cost Homeowners a Lot
One reason purchase requests probably are not down is simply because the rate jump doesn\’t equate to a huge hit to the pocketbook.
For the median U.S. home worth $191,200, a further 25-basis point jump from 4% to 4.25% is only the hypothetical home buyer another $22 per thirty days. That isn\’t enough to make or break a sale decision for most folks.
Heck, in Detroit it’s a $16 jump (is always that even a jump?) in monthly payment…
However, in expensive markets like S . fransisco, a .25% increase in rate implies $95. But again, wealthy tech employees can probably absorb another $100 or so.
I should indicate that most home buyers have trouble with the pay in, not the monthly payment, so rate increases aren\’t of major concern. I\’d in reality be more worried about rising prices that need more cash at closing.
Home pricing is still expected to rise 3.6% in 2017 rapidly upward pressure on loan rates, this according to more than 100 economic and housing experts surveyed by Zillow.
In other words, don\’t get your hopes up that prices will fall although your monthly mortgage payment got higher in price.
The increase in rates will likely just hurt the mortgage industry, namely those lenders that rely mainly on refinance activity to create business.
It\’s why we still see mortgage lenders focusing on the investment market, with newcomers like Motto Mortgage emerging, and companies like Caliber Mortgage launching the so-called Ultimate Homebuying Experience.