BLOG VIEW: Interest rates could be the biggest hurdle facing real estate in 2018. There’s no other force that can so quickly or universally cause the housing market to rise or fall.
“Interest rates for 2017 stayed right around four percent,” says Rick Sharga, executive vice president at Ten-X.com, the online real estate marketplace. “According to Freddie Mac, the weekly low for the year took place in mid-September, when 30-year rates for conforming loans hit 3.78 percent. This is a rate that isn’t just somewhat low: it’s fairly close to the 3.31 percent record set in 2012.
“Even the high for the year – 4.3 percent in mid-March – would make borrowers from past decades envious,” Sharga adds. “For perspective, consider that in 2000, the average mortgage rate for the year topped eight percent, about twice as high as today.”
But what about 2018? Where do we go from here?
“It’s unlikely that the economic environment will be much more favorable for housing and mortgage markets in 2018 and 2019,” explains Sean Becketti, Freddie Mac’s chief economist. “We forecast that interest rates will remain low by historical standards, but gradually creep higher over the next two years.”
The Mortgage Bankers Association (MBA) expects rates to hit 4.8% by the end of 2018 and to top 5% in the last quarter of 2019.
The National Association of Home Builders (NAHB) sees mortgage rates reaching a modest 4.31% in 2018 and 4.82% in 2019. NAHB also predicts that the prime rate will reach 4.98% this year and 5.66% in 2019.
In effect, NAHB is predicting that the rate for mortgages will be lower – a lot lower – than the prime rate.
Mark Fleming, chief economist at First American Financial Corp., says in a recent blog post that “historically low rates offer some relief in the form of strong borrowing power; however, rates are expected to rise in the months to come, so if you are renting and thinking of buying, now is the time.”
Rising interest rates have a direct and measurable impact on home sales. According to Lawrence Yun, chief economist at the National Association of REALTORS (NAR), “every 10-basis-point rise in mortgage rates can shave off approximately 35,000 in home sales annually.”
In other words, if rates go from the 4% range to 5% or so, we’ll likely see 350,000 fewer home sales. Such a decline will mean less demand and less pressure to raise prices.
Yun expects rates to reach 4.5% in 2018.
Lastly, the economy could slow down, causing interest rates to rise while wages fall. As Leo Abruzzese wrote recently in The Economist: “Recessions typically start when central banks, eager to keep economies in check, raise interest rates too far and too fast. On cue, America’s Federal Reserve will probably raise rates three times in 2018 after three increases in 2017. The Fed will also begin unwinding the enormous pile of assets it acquired during the slump. Although the Fed has promised to move carefully, higher American interest rates are the canary in the coal mine of the global economy. They foretell an end to credit cycles as indebted companies and consumers default in greater numbers, and they presage big capital outflows from emerging markets. Higher interest rates can also produce big corrections in stock markets; one index of global equity prices doubled between 2010 and 2017. To many it may feel as if 2018 is just the beginning of the real recovery. In fact, it may be approaching the end.”
The view here is that the economy is fundamentally chugging along as it has for the past several years. If we assume more of the same for 2018, then mortgage rates near 4% are likely to continue. This would mean mortgage rates below the prime rate, as the homebuilders predict.
Peter Miller is a contributing writer for Ten-X and Auction.com, as well as a nationally syndicated newspaper columnist. He is the author of the 2016 edition of The Common-Sense Mortgage.