Mortgage interest rates enjoy an “X factor” role among prognosticators offering their 2017 housing outlooks.
Nearly everyone knows they’re bound to go up. Just like everyone knew they were bound to go up this time last year, but predicted orderly, gradual, ever so slight incremental increases in step with barely detectable, but sure-footed economic growth.
Now, prospects are for a potentially much wilder ride.
Here’s a quick take on post-election interest rate moves–30-year mortgages spiked 51 basis points since Nov. 9, as reported by Freddie Mac, “the highest we’ve seen this year.” Here’s a look at a fever-line getting hotter.
As for the impact (explicitly, on refinances, but also on new purchases), here are some takeaways highlighted in Black Knight’s October Mortgage Monitor.
- The number of potential refinance candidates dropped by over 50% within three weeks of the U.S. presidential election as 30-year mortgage rates jumped 49 BPS
- Approximately $1 billion/month aggregate in potential savings remains available; down from $2.1 billion/month immediately prior to the election
- It now takes 21.6% of the median monthly income to purchase the median-priced home, the highest share needed since June 2010, when rates were 4.75% but average home values were 20% less than today
- In 2013, when the affordability ratio hit a similar level (21.4%), annual home price appreciation decelerated rapidly, from nine percent to below five percent
- Even with recent rate jumps, the national payment-to-income ratio is 10% lower than during the benchmark period of 1995 – 1999
Interest rates, housing economics observers argue, are a glass-half-full-glass-half-empty issue, although any shift in direction and accelerated rate of change are grounds for high anxiety. This is true particularly for those home builders who are selling new homes on an attainable monthly payment value proposition as a refuge from sky-rocketing rents.
Now those builders, and an increasing number of big national public builders who’ve bulked up in their lower-price-tier entry level and entry-level premium communities are going to experience the risk associated with the shrinkage of buyer universes based on the impact interest rate increases exert on monthly payments.
On an immediate and near-term basis, the specter of an interest-rate lift-off from the dirt cheap rates almost taken for granted over the past several years might be motivating, as buyers who’ve been waiting on the sidelines spring into action. Apparently, this may be going on in Seattle now. Seattle Times business reporter Mike Rosenberg probably looks at interest rate movement as do many others in the mainstream business press. He writes:
Rising mortgage rates that have swept the country since the election are whipping the local housing market into a frenzy during a normally slow time of year. Some buyers are finding out that they can no longer afford the same house they were approved for just months ago. And others who had been kicking the tires are frantically rushing to seal the deal on their new home, fearing interest rates will rise even higher.
By and large, the reason knowledgeable housing economists and analysts debate over the magnitude of the effect rising interest rates will have on the pace of sales and recovery’s plodding momentum is that past experience has shown two different scenarios. Normally, economic growth, jobs and income growth and a strong outlook will (ahem) trump higher interest rates fueling housing demand.
More recent experience came during the Summer of 2013, when then-Fed chair Ben Bernanke telegraphed the end of monetary easing and a subsequent tightening of money supply, which caused a sell-off in Treasuries, a spike in mortgage interest rates, and a big wet blanket on what had been pretty robust traction in the housing market up until then.
So, the question is, when–not if–interest rates go up, what effect will the change have in the current demand environment. To really know the answer, one would have to understand how many buyers in the prospective buyer universe are particularly sensitive to the historically low rates that have prevailed ’til now.
Redfin content producer Alex Starace wrote up the results of a Redfin survey on precisely this topic, among 2,415 users of its website, all of whom confirmed they had recently bought or were planning to buy a home. Here’s how those respondents reacted to a question on what they’d do if rates were to go up by 100 bps (even before they actually did spike by 50 basis points).
Starace notes:
“Most buyers are looking for a home because of their personal economy, such as an expanding or shrinking family, or a job relocation, rather than only because of the broader economy,” said Redfin real estate agent Danielle Field in Louisville. “Yes, a few people will be kept from the market because of interest rates, but for many people moving homes just isn’t something you can time to the market like the buying or selling of a stock.”
Note to home builders: do not get sucked into the fallacy of averages, medians, and macro trends. Many of these data points, including what happens to interest rates, and most emphatically, who’s capable of gaining access to the housing finance credit box, are absolutely immaterial to the success or failure of your business.
Your business will win or lose not based on who cannot buy your homes because they’re priced out, or can’t get a loan. Rather, it depends on your capturing those–many, many of them–who can buy your homes and buy into your neighborhoods, but choose for some reason not to.
