These (Mortgage) Rates are on Fire!

By Micah Stovall | Published: March 2, 2018

Mortgage interest rates have already risen by over a quarter of a percentage point in 2018. Many are projecting that rates could increase to 5% by the end of the year. Since the housing collapse 10 years ago, the U.S Federal Reserve has maintained a loose monetary policy, keeping interest rates low and providing easy access to credit. But with the economy nearing full employment and corporate America raking in record profits, the Fed’s policy is tightening. After years of a fixed 30-year mortgage interest rate below 4 %, that rate is now 4.5% What impact will rising rates have on house values? Well, many quickly jump to the conclusion that an increase in mortgage rates will have a detrimental impact on real estate prices as fewer buyers will be able to qualify for a loan. This seems logical; if there is less demand for housing then prices will drop. However, in a good economy, rising mortgage rates increase demand as many prospective purchasers immediately jump off the fence to guarantee they get the lower rate. Anxiety over rising interest rates was one of the factors that caused the recent stock market swings, and it’s only a matter of time before rising rates seep into the housing market. For prospective homebuyers, rising rates might put some pressure on finding a home sooner than later, as rates are unlikely to get better than they are now. A sense of urgency would be justified because the lower the rate a homebuyer can lock into, the easier it’ll be to make a monthly payment. For a homeowner with a variable-rate mortgage, rising rates would lead to suddenly higher mortgage payments. CoreLogic built a model to project what a typical monthly mortgage payment would be if the rates rose by 0.85 percentage points over the next year, which it calculated by averaging multiple rate increase forecasts, including from Freddie Mac, Fannie Mae, and the Mortgage Bankers Association.

The model assumes a 2.6% rise in real home prices. Taking this into account, the typical monthly mortgage payment would rise from $804 to $910, a 13.3 percent increase. However, when the projection is adjusted for inflation, it’s still 36.4 percent below the all-time high of $1,263 set in June 2006. And for further context of the rate itself, even a dramatic rate increase wouldn’t put it near all-time highs. It’s hard to imagine now, but in the early 1980s, the fixed 30-year mortgage rate was about 18 percent. By the 1990s, it fell to about 10 percent and has steadily fallen ever since. In each case, home prices APPRECIATED and did not depreciate. No one is projecting as dramatic an increase in rates as the examples shown. Most are projecting an increase of approximately 1% by the end of the year. The last time mortgage rates increased by 1% over a twelve-month period was January 2013 (3.41%) to January 2014 (4.43%). What happened to house prices during that span? They appreciated by 9.8%.