[Ed Note: This economic forecast is republished for quick access for LendingLife readers, with the permission of author and economist Mark Fleming. The original post can be read on the First American Economic Center Blog, right here.]
The Federal Open Market Committee (FOMC) meeting is just around the corner, and experts agree that an increase in the Federal Funds Rate is almost certain. In fact, the expectation of future Fed rate hikes is already putting upward pressure on mortgage rates. The benchmark 30-year, fixed-rate mortgage rate jumped three basis points to 4.4% this past week. Since the start of the year, the benchmark rate has climbed almost half a percentage point and has increased for eight consecutive weeks. Concern is growing about the impact of the rising mortgage rates on the housing market, but it is important to keep today’s mortgage-rate environment in perspective.
Let’s transport ourselves back to the early 1980s. In 1981, a prospective home buyer walking into a bank would have been offered a new 30-year, fixed-rate mortgage at a staggering 18% interest rate. Just four years earlier in 1977, that same bank would have offered the same mortgage for 8%. The four years between 1977 and 1981 witnessed the most dramatic increase in mortgage interest rates in the last 50 years. At its most extreme point in 1980, mortgage rates experienced a 50% year-over-year increase. The historically unprecedented increase had a devastating effect on the housing market – single-family home sales declined by 36% between 1979 and 1981.
What if Interest Rates Doubled?
Considering this historical context – is the housing market today as sensitive to mortgage rate increases as it was 40 years ago? How would a significant increase in the 30-year, fixed-rate mortgage rate impact the housing market today?
Fortunately, the answer is not as dramatic as many may think. In fact, using our Potential Home Sales model, we doubled the mortgage rate from its current value of about 4.4% to approximately 9% and the market potential for home sales declined from the current value of 6.1 million SAAR to 5.8 million SAAR. So, if mortgage rates doubled overnight, our model indicates a decline of just 300,000 sales, a mere 5% decrease.
Let’s be clear. Mortgage rates increasing to nearly 9% is extremely unlikely. There is…