Why 5 Percent Mortgage Rates Are Not A Threat

Dated: 06/21/2018

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June 19, 2018

Mortgage rates are on the rise. Could that derail sales? According to First American’s Potential Home Sales model, even if the 30-year fixed-rate mortgage rose to 5 percent, the impact on the housing market would be modest.

 

Many economists are predicting that the 30-year fixed-rate mortgage will average 5 percent by the end of 2018 or early 2019.

 

First American’s Potential Home Sales model estimates the potential for existing-home sales based on market fundamentals. The market potential for existing-home sales based on current fundamentals is 6.11 million at a seasonally adjusted annualized rate. If the 30-year fixed-rate mortgage rose to 5 percent, the impact would be a slight decline to 6.1 million existing-home sales, according to the model.

 

“The reason mortgage rates are rising—positive economic conditions—is also causing household income to rise, which helps offset the increase in borrowing costs from higher rates,” Mark Fleming, First American’s chief economist, writes in a column at the company’s Economic Center Blog.

 

Also, home buyers can adjust to higher mortgage rates by taking a lower rate available through an adjustable-rate mortgage than a fixed-rate mortgage or by purchasing a less expensive home, Fleming notes.

 

“The housing market is flexible and can adjust to moderately higher mortgage rates without significant impact,” Fleming writes. “The likely rise in mortgage rates is not the worry for first-time home buyers, but whether they can find something to buy in today’s supply-constrained market.”

Source:  “What’s the Outlook for Housing Market Potential Amid Rising Mortgage Rates?” First American Economic Center Blog (June 18, 2018)

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