The housing market could stall if interest rates spike by more than 1.5 percent, according a recently released analysis from Freddie Mac.
Freddie Mac delved into the past to review periods when interest rates spiked and analyze the effects on the housing industry and concluded:
- Based on prior experience, if rates continue to hover between 3.5 and 4.5 percent and inflation remains low, expect originations, home sales and housing starts to each increase by 5 percent to 10 percent in 2018.
- If rates spike by 1.5 percent, originations would fall by 30 percent, with home sales and starts also dropping between 5 percent and 11 percent.
- The most dramatic increase in mortgage rates in the last 50 years came during a four-year period ending in 1981, when rates increased from 8 percent to 18 percent. This hit the industry hard, causing new mortgage originations to fall nearly 40 percent; annual single-family home sales to drop 36 percent; and housing starts for single-family homes to plummet over 51 percent.
Rising mortgage rates can be challenging for U. S. housing and mortgage markets, according to Deputy Chief Economist Len Kiefer.
“In historical episodes of rising rates, home sales slipped, housing starts stalled and mortgage originations swooned,” Kiefer said in a statement. “Homebuilders are doubly affected by increasing mortgage rates because they use financing to fund construction costs. When interest rates on funding for new construction and mortgage rates rise simultaneously, home builders are squeezed by a fall in demand and an increase in costs. However, though rates have moved higher recently, mortgage credit is still historically cheap if borrowers can get in while the getting is good.
“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,” he said in a statement.