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Higher mortgage rates set to have impact on US housing market this year

Rising mortgage rates and their impact on housing affordability will be the most significant force in the property market in the United States in 2017, it is suggested.

The latest quarterly survey from real estate firm Zillow and conducted by Pulsenomics asked more than 100 housing experts and economists what factors would have the greatest impact on US housing this year.

The most frequent answer was rising mortgage rates and their impact on mortgage affordability, with more than half of panellists selecting it, followed by low inventory and shifting demographics.

The report points out that buyers and home owners have been able to take advantage of historically low mortgage rates on purchase or refinance loans for the past several years, but rates jumped following the Presidential election in November and have since hovered around 4%.

In December the Federal Reserve voted to raise the federal funds rate, which can influence mortgage rates, by 25 basis points for the second time in the last decade and set expectations for the possibility of a more aggressive rate hike cycle throughout 2017.

Similarly, home price appreciation accelerated at the end of the year, and income growth is not keeping pace, the survey report also points out, adding that with both mortgage rates and home values rising, paying for a home with a mortgage becomes more expensive and requires a larger percentage of income each month.

But since mortgage rates have been at historical lows for several years, and recent increases have been relatively small, they have not yet had significant effects on home value appreciation. For buyers of the median home, valued at $193,800, an increase from 4% to 4.25% would only increase their monthly mortgage payments by $23.

As rates rise, though, monthly payments for homes will increase, and buyers’ budgets will be more strained, the report explains. Since 77% of buyers use a mortgage to finance their purchase it says that this will affect the majority of buyers, and the market will not be able to sustain the more rapid home value appreciation seen in the past few years.

Most experts believe there won’t be a significant slowdown in appreciation until rates reach 5.5% which isn’t likely to happen this year. Zillow expects the conventional 30 year fixed mortgage rate to be closer to 4.75% by the end of 2017.

‘Rising mortgage rates, inventory shortages and demographic shifts will be the main drivers of the US housing economy this year, especially for first time buyers who will face tougher competition for entry level homes and often operate with a tighter budget than move-up buyers,’ said Zillow chief economist Svenja Gudell.

‘When you combine higher mortgage rates with increasing home values, mortgage affordability starts to suffer, and buyers will have to spend more and more on their monthly payments. This makes it even more important for buyers to prepare their finances, and shop around to make sure they are getting the best possible rate,’ she added.

Another potential effect of rising mortgage rates is their influence on current home owners, who may decide not to sell their homes to avoid needing a new mortgage at a higher rate, leading to more constrained inventory. More than half of the respondents, some 56%, in this survey said this mortgage rate lock-in is already or will have a meaningful impact on the housing market.

Home values rose 6.8% in 2016. Overall, the experts surveyed predict home prices will rise 4.6% in 2017 and then slow to 3% annual growth by 2019.

‘Compared to their outlook in our previous survey just a few months ago, most of our panellists now expect somewhat stronger home value appreciation this year and next, as tight inventory conditions persist,’ said Pulsenomics founder Terry Loebs.

‘However, longer term the consensus still calls for decelerating prices, with the most pessimistic quartile of experts continuing to project negative inflation adjusted returns for US housing beyond 2017. The spectre of rising mortgage rates and other affordability hurdles are clearly impacting these home value projections,’ he added.