How Rising Rates Will Impact Home Prices

Market Watch  |   March 9, 2017

Americans have, so far, stood resilient to rising mortgage rates, but a bigger impact will come soon, say Goldman Sachs economists. Housing’s share of the economy rose above normal levels from November to January, despite mortgage rates surging 60 basis points at the time. Still, economists caution that there may be a lag to the impact of rising rates and particularly their effect on home prices. In an analysis—pulling data from past 100-basis point increases in mortgage rates—economists found that the median home price often drops 3 to 4 percent. “This median estimate suggests that the recent 60 basis point rise in mortgage rates should, all other things equal, lower house prices by 2 to 3 percent,” the Goldman analysts concluded. “This estimate thus supports our forecast that national house prices will continue to rise, but at a slower pace in the next few years.” That said, buyer demand is much stronger than supply at the moment and the economy and job growth are continuing to support the housing market. “The housing market is also in a more virtuous cycle: Home equity has recovered, mortgage rates remain low enough to be manageable, and high rents make homeownership attractive,” MarketWatch reports. Many economists are skeptical whether mortgage rates will actually rise much more than they already have. A survey conducted by MarketWatch in December 2016 showed an average for rates of 4.5 percent throughout 2017, a 35 basis point increase from current readings.

Source: Market Watch