On June 13, The Federal Reserve increased its short-term interest rate 0.25 percentage points to 2 percent — the second rate hike to take place this year.
While some real estate professionals may be concerned about rising mortgage rates, First American Chief Economist Mark Fleming says there’s no need for alarm. According to Fleming’s latest Potential Home Sales Model report, the housing market could handle a 30-year, fixed-mortgage rate of 5 percent, something that’s predicted to take place by year’s end.
“If the 30-year, fixed-rate mortgage rate increases to 5 percent, which most economists agree is likely by the end of 2018 or early 2019, the impact on the market potential would be a modest decline to 6.10 million existing-home sales, according to the model,” he said in a statement.
Furthermore, Fleming says short-term rate hikes “matter little” to the housing market and that “higher inflation expectations” have a greater impact.
“The Fed’s decision to raise rates for the sixth time in a year and a half was primarily viewed by experts as a reaction to the possibility of higher inflation due to continued improvement in the labor market and economy in general,” he said.
“Consider that, since the end of the recession, the 30-year, fixed-rate mortgage, on average, has stayed 1.7 percentage points higher than the 10-year Treasury bond yield.”
“Today, the 10-year Treasury yield sits at 3 percent, which implies a mortgage rate of about 4.7 percent, given the trend since the end of the recession,” Fleming added.
Along with the rise in mortgage rates and inflation expectations, there’s been a steady rise in wages, which allows homebuyers to absorb the increase in borrowing costs. Lastly, Fleming said buyers should begin weighing their mortgage options or consider lowering their budget.
“Additionally, homebuyers can adjust to higher mortgage rates by substituting a lower rate adjustable-rate mortgage for the fixed-rate mortgage or buy a less expensive home,” he noted. “In other words, the housing market is flexible and can adjust to moderately higher mortgage rates without significant impact.”
“The likely rise in mortgage rates is not the worry for first-time homebuyers, but whether they can find something to buy in today’s supply-constrained market.”
With all these factors in mind, there’s one question that needs to be answered: “Is it a good time to buy or sell?”
“When considering the right time to buy or sell a home, an important factor in the decision should be the market’s overall health, which is largely a function of supply and demand,” Fleming said. “Knowing how close the market is to a healthy level of activity can help consumers determine if it is a good time to buy or sell, and what might happen to the market in the future.”
The May 2018 Potential Homes Sales Index is underperforming its potential by 4.7 percent or an estimated 289,000 (SAAR) sales, but the market performance gap has decreased by an estimated 36,000 (SAAR), suggesting that minimal improvements are taking place.
Like Realtor.com Chief Economist Danielle Hale said after last week’s Fed announcement, buyers would be smart to take advantage of the small bump in inventory.
“Homebuyers who have been able to take advantage of the uncertainty to lock lower rates are likely to be satisfied with their decision,” Hale said. “In spite of ongoing record-low inventories in the housing market, we know that 557,000 new listings hit the market in May, the highest number since summer 2015.”
“These new listings may be just the opportunities homebuyers need to find and close on a home,” she added.