As mortgage rates continue to rise, housing market trends will shift. Rising rates may make homeownership less affordable and may cause “hot” markets to start to level off as buying becomes less accessible. However, in the short term, these rising rates may cause buying activity, demand, and values to spike as buyers move to purchase quickly before homeownership is out of their reach.
According to Freddie Mac, national average mortgage rates rose to 4.38 percent last week on a 30-year fixed-rate mortgage. That rate, while still historically low, is the highest posted since April 2014. 15-year fixed-rate mortgage interest rates averaged 3.84 percent (up slightly from the previous week), and five-year hybrid adjustable-rate mortgages (ARMs) averaged 3.63 percent, also up slightly. This time in 2017, five-year ARMs averaged 3.18 percent.
While these numbers may send some buyers into a tailspin and will certainly affect the borrowing population’s ability to get new mortgages, most analysts agree that rising rates will not precipitate another housing crash. Lending requirements are far stricter than they were prior to the most recent crash, which will likely insulate the housing market from another meltdown. However, some analysts, like money manager James Stack, think differently. Stack told Bloomberg at the end of January, “It is 2005 all over again in terms of the valuation extreme, the psychological excess, and the denial.” He went on to imply housing prices are “a little bit bubblish.” Many disagree, however, noting that homebuilders are selling homes at all levels of the market essentially as soon as the new construction is completed.
As real estate markets continue to warm, rising interest rates could cause some cooling because they will drive monthly payments out of the realm of affordability for a certain subset of homebuyers. Real estate investors can benefit from this cooling trend by creating other housing options to meet the needs of this population. For example, some investors leverage creative financing strategies to create buying populations outside of conventional financing, while others simply choose to offer attractive rental housing options that are likely to appeal to households that would, ideally, prefer to buy but have opted not to do so.
In the short term, rising interest rates will likely increase buying activity as people “jump off the fence” and start actively looking for a home to purchase before interest rates rise more. “A lot more people are cognizant of interest rates [today] than in the last 12-24 months,” a Hoboken real estate agent told Business Insider over the weekend. He noted that homebuyers may begin “settling” for properties at the lower end of their budgets in order to secure their home ownership and remain competitive during the buying process.
Investor Insight:
As mortgage rates continue to rise, housing market trends will shift. Rising rates may make homeownership less affordable and may cause “hot” markets to start to level off as buying becomes less accessible. However, in the short term, these rising rates may cause buying activity, demand, and values to spike as buyers move to purchase quickly before homeownership is out of their reach.
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