Can Today’s Housing Market Still Thrive With Rising Mortgage Rates?

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How much are rising mortgage rates holding back home sales?

It depends on who you ask.

According to Ellie Mae’s most recent Millennial Tracker report, millennial homebuyers continued to close purchase loans in September, despite the fact that the average rate on a 30-year fixed-rate mortgage rose to 4.87%, up from 4.86% in August.

“Despite rising interest rates, millennials are still looking to buy homes,” says Joe Tyrrell, executive vice president of corporate strategy for Ellie Mae, in the report. “We’re still seeing the majority of millennial loans fall into the conventional loan category, and with interest rates increasing, there is an even greater opportunity for the industry to educate these buyers on all of the options that they have available to them, including some of the higher loan-to-value products and FHA loan programs.”

According to Ellie Mae’s data, 89% of millennial loan volume in September was for home purchases, three percentage points higher than a year earlier.

And 88% of those closed purchase loans were conventional mortgages, compared to 81% in September 2017.

Meanwhile, over at First American, Chief Economist Mark Fleming says today’s housing market can still thrive with mortgage rates at 5%.

“Despite all the talk about rising mortgage rates, it’s important to evaluate this in context,” Fleming says. “While today’s rates appear higher than the three to 3.5 percent rates of 2016, they remain well below the historic average of eight percent. Yet, the increase in borrowing costs for home buyers, given increasing home prices, has prompted discussion about how the housing market will respond to higher rates.”

Title agents and real estate professionals recently surveyed by First American also believe the housing market is fairly resilient to rising rates.

“For example, earlier this year, we asked title agents and real estate professionals what mortgage rates would need to hit before discouraging potential first-time buyers from the market,” Fleming says. “Their estimate: 5.6 percent. When we asked the same question in the first quarter of 2017, the response was 5.4 percent.”

Fleming points out that, historically, the housing market has performed well when mortgage rates were considerably higher than today. Rates averaged 6% between 2001 and 2009. In 2000, they averaged 8.05%. In the decade between 1980 and 1990, they averaged a whopping 12.5%.

“However, the key take-away is that people were still buying homes across all of these mortgage rate eras,” Fleming says. “Mortgage rates have adjusted in the past in response to high inflation, a technological revolution, a housing crisis and a financial collapse. However, today’s higher mortgage rates are due to a near record-long economic expansion, and a strong labor market. If you think five percent is high, take a walk down mortgage memory lane.”

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