Rising mortgage rates are the focus of the latest Insights report from Freddie Mac and considers the likely impact on the market.
Based on historical data, the report says that a 1.5% spike in mortgage rates would result in a 30% drop in originations as home sales and starts tumble 5-11%.
"History has shown that periods of rising mortgage rates can be challenging for U.S. housing and mortgage markets,” said deputy chief economist Len Kiefer. “In historical episodes of rising rates, home sales slipped, housing starts stalled, and mortgage originations swooned.”
Kiefer added that builders face the prospect of higher costs of financing construction, a fall in demand.
However, the report also says that if rates continue in the 3.5-4.5% range, and if inflation stays low; then originations, home sales and starts could all be expected to increase 5-10% in 2018.
"If rates rise, will housing markets follow the historical precedent, or will they buck the trend and maintain momentum? It's uncertain, but with a solid labor market, rising household incomes, and a demographic tailwind from a large young adult population coming of age, U.S. housing markets could show modest growth this year even with higher mortgage rates."
What we don’t want is another 1977-81
Freddie Mac’s report highlights the dramatic impact of the rate rise of 1977 to 1981.
Mortgage rates soared from 8% to 18% and saw new mortgage originations plummet 40% with annual single-family home sales down 36% and housing starts for the sector plunged 51%.
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