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As historically low national mortgage rates begin to rise in 2017, real estate experts are speculating on how these rising interest rates could affect the US housing market. And, while most experts agree that rising interest rates could have a drastic impact on affordability for some homebuyers, the news isn’t all bleak.
For its quarterly Home Price Expectations Survey, Zillow and the independent economic research firm Pulsenomics surveyed over 100 housing experts and economists, focusing on what factors they believed would have the greatest impact on the US housing market this year. The predominant answer given by more than half of respondents was increasing mortgage rates and their impact on housing affordability “will be the most significant driving force in 2017.”
While both homebuyers and homeowners have been able to take advantage of the low interest rates to either buy or refinance, rates have been inching up since the November election. In December the Federal Reserve moved to increase the federal funds rate, which affects mortgage rates. This was only the second time in the last 10 years such an increase occurred, leading to rising speculation of “a more aggressive rate hike cycle” in 2017.
At the same time, home price appreciation accelerated as 2016 came to a close, but income growth isn’t keeping up. Home values increased almost 7 percent in 2016, and they are expected to rise 4.6 percent in 2017 before slowing to 3 percent annual growth by 2019, according to respondents.
The problem for homebuyers is that as home prices rise with interest rates, housing payments also increase. And with approximately 77 percent of homebuyers using mortgages to purchase their home, these increases will affect the vast majority of American homebuyers.
Other major drivers of the 2017 US housing market will be low inventory and the shifting demographics of both Baby Boomers and Millennials, as the housing needs of aging Baby Boomers change and Millennials age into their prime homebuying years, says Zillow’s data. The top housing concern among Baby Boomers is affording their home, so it will be of particular interest to see how rising interest rates might exacerbate their woes.
“Compared to their outlook in our previous survey just a few months ago, most of our panelists now expect somewhat stronger home value appreciation this year and next, as tight inventory conditions persist,” said Pulsenomics founder Terry Loebs.
Loebs added that looming mortgage rate hikes and other affordability hurdles are clearly impacting home value projections, although clearly only time will tell how great their impact will be.
But the news isn’t all bad, says Zillow’s sister site, Trulia.
Many homebuyers often rush into buying a home as interest rates begin to climb, but Trulia’s Chief Economist Ralph McLaughlin warns that interest rates are just one factor to consider, and homebuyers need not rush into a purchase that could prove to be a costly mistake down the road. However, rising interest rates shouldn’t be a “dealbreaker” either.
When considering the effect of rising interest rates on affordability, McLaughlin points out that national interest rates would have to hit 9 percent and up before renting is the more financially sound option, which is very unlikely to happen. And even in the most expensive US markets, the mortgage rates would have to exceed 5 percent to make renting a better monetary choice.
Another benefit of rising interest rates is that there is the potential for home prices to actually come down, as the number of potential buyers decreases. The biggest factors affecting price is inventory and competition, says McLaughlin. So, if you are looking to buy a home in an area with tight inventory and high demand for housing, rising interest rates will likely have little effect on home prices there.
And while some homebuyers feel they will be priced out due to rising interest rates, McLaughlin advises homebuyers to shop around for lenders that will work with them, and perhaps offer a low down payment or flexible underwriting options.