Mark Fleming: Gradually Rising Rates Won’t Impact Home Sales That Much

How much of an impact will gradually rising mortgage rates have on home sales in 2018?

Less than most people think, says Mark Fleming, chief economist for First American Financial Corp.

“There are a variety of reasons why people buy homes that are completely independent of mortgage rates,” Fleming says in First American’s monthly Potential Home Sales Model and analysis for January. “A gradual rise in mortgage rates won’t change that.”

Fleming says the consensus among economists is that the average rate for a 30-year, fixed-rate mortgage will approach 5% by the end of the year.

“Rising mortgage rates typically reduce the affordability of housing, as it means the cost of borrowing increases,” Fleming says. “So, the question is: how much will rising interest rates impact the amount of home sales?

“Our Potential Home Sales model forecasts what the market potential for home sales should be given current economic, demographic and housing market environments,” he explains. “Potential home sales, while currently at a level of 6.1 million SAAR, are expected to reach an estimated 6.29 million SAAR by the end of 2019, despite a rising rate environment.

“However, while the yearly growth rate in potential sales is currently at 3.6 percent, it is expected to slow to just below 1 percent by the end of 2019,” he adds.

Fleming points out that, historically, a 30-year, fixed-rate mortgage of 5% “is still a very low rate.”

“In fact, the mortgage rate has been greater than five percent in 38 of the last 46 years, so it is unlikely that large numbers of home buyers will be dissuaded by a modest increase in mortgage rates,” he says.

Pent up demand due to lack of inventory could also result in some home buyers overlooking rising rates.

LEAVE A REPLY

Please enter your comment!
Please enter your name here