Fannie Says Rising Mortgage Rates Will Not Curtail Home Sales But Other Factors Might
Written By: Joel Palmer, Op-Ed Writer
Most experts who follow the mortgage believe mortgage rates will continue to rise. But unlike the last time that mortgage rates increased significantly, Fannie Mae economists don’t think higher rates will translate into falling home sales.
In its latest Economic and Housing Outlook, Fannie forecasted a slowdown in sales for the remainder of this year, though it reiterates that home sales will likely be higher than in 2020. But an increase in mortgage rates won’t be the main culprit.
“The rise in mortgage rates over the past month, and our upwardly revised rate forecast, led to only a slight decline in our sales outlook,” Fannie said in the report.
The outlook pointed out the impact on home sales the last time mortgage rates increased significantly. This occurred in 2018, when the 30-year rate increased more than 100 basis in 14 months. This resulted in home sales falling 8 percent on a quarterly basis, despite strong economic indicators.
“If something similar were to occur over the next year, there are reasons to believe that the drag on sales would be considerably smaller,” according to the outlook.
First, Fannie noted that the “lock in” effect will be weaker this year than in 2018. This means that even if mortgage rates peak at 3.5 percent this year, potential homeowners can still get a lower rate than at any point prior to the last year. Fannie said it expects the lock-in effect to be muted for the next couple of years as long as rates stay at 4 percent or less.
In 2018, mortgage rates jumped to nearly 5 percent, the highest rate since 2011. Most homeowners had purchased at a lower rate in the previous years, creating a disincentive to buy a new home or to refinance.
Another reason that increasing rates won’t hurt the mortgage market is that rates will still be near historic lows. Fannie said that even with the increase in home values, mortgage payments are more affordable than they were in 2018.
“Using a 30-year fixed mortgage at 90 percent loan-to-value (LTV) ratio, the ratio of principal and interest payments on a median priced home relative to median family income is currently well below the 2018 peak. To reach a similar point today, the 30-year rate would have to be about 3.9 percent,” according to the outlook report.
Even with higher rates, Fannie notes that homebuyers can absorb higher mortgage payments. Consumers have consumed less in the past year, due largely to the pandemic. They have used extra money to either pay down debt or save more. In fact, credit card balances were paid down by $118 billion in the last year. Therefore, potential homebuyers can afford bigger down payment and have less debt in their budget to make room for higher monthly house payments.
Even if mortgage rates don’t lead to slowing home sales, a few other factors might.
One is the continued dearth of homes for sale. Because of the continued lack of inventory, would-be buyers that drop out of the market due to rising mortgage rates will be replaced by others that have been outbid on the few homes that have been on the market.
The other factor that could slow home sales is COVID-19 and whether homebuyers delay or move forward home purchases due to the pandemic.
“Given the other COVID- and macroeconomic-related dynamics in play over the next couple of years, we do not believe the primary uncertainties regarding the level of home sales are around the future mortgage rate path,” Fannie concluded.
About the Author
As an NAMP® Opinion Editorial Contributor, Joel Palmer is a freelance writer who spent 10 years as a business and financial reporter and another 10 years in marketing for the insurance and financial services industries. He regularly writes about the mortgage industry, as well as residential and commercial real estate, investments, and retirement income planning. He has also ghostwritten books on starting a business, marketing, and retirement income planning.
