Freddie Mac’s latest insight analyzes the effect of higher mortgage rates on both home buyers and those wishing to refinance.
The government-sponsored enterprise predicts home sales and housing starts to each increase by 5-10 percent in 2018 if mortgage rates continue to hover between 3.5 percent and 4.5 percent and inflation remains low.
However, if 2018 rates increase by 1.5 percentage points, Freddie Mac predicts originations will decline by 30 percent and home sales and starts will drop between 5 percent and 11 percent.
“History has shown that periods of rising mortgage rates can be challenging for U.S. housing and mortgage markets. In historical episodes of rising rates, home sales slipped, housing starts stalled, and mortgage originations swooned,” Freddie Mac Deputy Chief Economist Len Kiefer said in a release.
“Home builders 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,” Kiefer added. “However, though rates have moved higher recently, mortgage credit is still historically cheap if borrowers can get in while the getting is good.”
Kiefer said the U.S. housing markets could show modest growth this year even with higher mortgage rates due to a solid labor market, rising household incomes and a demographic tailwind from a large young adult population coming of age.