Worried that the recent increases in interest rates will stall the housing recovery? Relax. According to Freddie Mac’s latest U.S. Economic and Housing Market Outlook interest rates have a long way to climb before we’d see a substantial reduction in demand for home purchases.
From the report…
To be sure, low mortgage rates have helped fuel the recent good news in housing, where house prices have been increasing across most of the country. While it’s true that rising mortgage rates and increasing house prices work together to drive up the cost of buying a home, mortgage rates remain near their 60-year historical lows helping to keep homebuyer affordability strong. At today’s house prices and income levels, mortgage rates would have to be nearly 7 percent before the U.S. median priced home would be unaffordable to a family making the median income in most parts of the country. So while rising interest rates will reduce housing demand, rates would have to increase considerably more before the reduction in demand for home purchases would be substantial across the country.
Check out FreddieMac’s June 2013 U.S. Economic & Housing Market Outlook
Related story: Buying Cheaper Than Renting Til Mortgage Rates Hit 10.5%
Jeffrey Dow Jones
Hi Guy,
I wrote about something similar last week after exploring a bunch of the latest data from the industry. Some of the charts I drew are pretty interesting.
http://cornicecapital.com/AlpineAdvisor/2013/06/13/real-estate-so-long-and-thanks-for-all-the-fun/
This Freddie Mac report uses an absolute term “unafforable,” implying a point at which above the housing market is too expensive and below it’s inexpensive/affordable.
In reality, it works more like a rubber band. As the relative valuation gets higher, the desire for it to snap back to a historical mean grows. (As does the energy with which it snaps, the further above the historical mean it gets.)
I’m a contrarian, so I’ve been bullish on real estate for a while now. But that’s changing, not that my opinion matters any. There’s still a little price appreciation to be had, and though interest rates aren’t at a level where they are severely impacting prices yet, they are unquestionably on the move and at some point that vector will take them to a place where it does matter.
Guy Johnson
Jeffrey, Thank you for your comment and thank you for the link to your charts.
…and thanks for reading the blog!
MikeZ
I was left disappointed by the TruliaBlog article “Buying Cheaper Than Renting Til Mortgage Rates Hit 10.5%” even after following the links to “Rent vs. Buy analysis” and the “detailed methodology,” which wasn’t very detailed. It’s missing the actual math and also key assumptions: there are no figures for maintenance, repairs, insurance, taxes, fees, loss of use and income on the 20% down payment, et cetera.
If you dig deep enough, you’ll find that the author assumes 2.2% price appreciation for the next 7 years. Is that reasonable? Probably not. It’s a very good bet that mortgage rates are going to continue to rise for the next few years (the 10y is now paying twice its 52w low) and sale prices are going to fall as a direct result – as NAR so often reminds us, the typical SFH home buyer purchases based on monthly payment, not price.
It seems to me that the most important question for any potential buyer right now is: what’s driving price growth in my area? In Reno and Sparks, it’s certainly not median household income growth, that’s flat or falling. The more you look, the more it looks like 2004-2007 all over again, when cheap money artificially inflated real estate prices.
And if that’s the case, buyers need to be very careful …
Matthew
Mickey over at The World Complex has repeated his Case-Schiller analysis since the bubble/bust here:
http://worldcomplex.blogspot.com/2013/06/the-evolution-of-case-shiller-index.html
His data indicates that the stability points existed regardless of the active interest rate at the time so I’m inclined to *ignore* the common talk about realtors about interest rates and demand. As far as I’m concerned the report you linked has the same conclusion that most realtors will tell you: “Price is going to keep going up, buy now or be priced out forever!”
MikeZ
Matthew, the chart at The World Complex plots the Case-Shiller index at year n vs. the index at year n-4. I’ve read the entire post 3 times now and still don’t see the mathematical significance of that graph. What does plotting year n vs. year n-4 tell us in terms of the future?
Matthew
MikeZ, it shows a “stability range” for what level of price increase/decrease we’ve seen for a four-year lagging period.
So whatever changes were made in interest rates you still didn’t see rapid increases/decreases in values year over year.
The point is that “large” swings in prices year over year aren’t related to interest rates. In fact, they don’t appear related to any pre-boom historical policies at all. A significant policy change in the late 90’s or early 00’s shows the breakout in year-over-year price action. It must have been something different than *just* interest rates.
The data indicates that solely a change in interest rate shouldn’t cause a dramatic/abnormal price change.
Sully
“The days of historically high levels of housing affordability are numbered,” said Zillow Chief Economist Stan Humphries. “Current affordability is almost entirely dependent on low interest rates, and there’s no doubt that rates will begin to rise in the next few years. This will have an undeniable effect on demand for housing, as home buyers will have to spend more of their incomes to buy a home. Home values will have to either remain stagnant while incomes catch up or, quite possibly, home values will have to fall in some markets. This will especially be the case in some markets that have seen strong home value appreciation.”
Entire article here: http://www.forbes.com/sites/zillow/2013/04/16/high-home-price-to-income-ratios-hiding-behind-low-mortgage-rates/
Matthew
We must accept that certain policies were responsible for an abnormal boom in pricing. It is essential for market stability for either prices to reduce or the *rate of increase* to slow.
Here is a historical chart of prime interest rates:
http://mortgage-x.com/trends.htm (scroll to the bottom).
The lag analysis of the Case-Schiller demonstrates that, despite the changing interest rate, we had year-over-year stability in price growth rates.