How Rising Interest Rates Will Impact the 2017 Housing Market

Since the election of incoming President Donald Trump, there has been a spike in mortgage interest rates. Whether the rate increases have come as a direct result of Trump is debatable – some would claim the increases came in anticipation of the Fed’s rate hike. There is, however, an undeniably strong correlation between the recent election and interest rates.

Truth is, there are probably multiple forces influencing the direction of mortgage rates, and regardless of what they are, the increased rates will affect the 2017 housing market. But how?

1. Less Affordability

Higher mortgage interest rates mean higher monthly premiums, which likewise mean overall higher housing costs. In a market where affordability is waning, even a slight increase to costs can be the difference between being able to buy and being able to rent (or move out of your parents’ house, if you’re a Millennial). In light of rising rates, the National Association of Homebuilders released a report when rates were just breaking the 4-percent barrier, stating that an increase of the mortgage rate from 4 to 4.25 percent would push the market’s median home price out of range for nearly 1 million households.

2. The Pricier Markets Will Be Hit Hardest

The nation’s home affordability problem is truly ubiquitous, and many have reached the point of overvaluation – which essentially means buyers are forced to pay more than the homes are worth. Of course, whether something can ever be truly “overvalued” is an entirely different debate. However, by Forbes’ standard, there are at least five housing markets across the nation that are overvalued by double digits – Austin, San Antonio, Phoenix, Las Vegas and San Francisco. In San Francisco, the median home price is over $1.1 million, compared to the national median of $192,500. In those markets where home prices are already abnormally high, any additional increases to mortgage rates will be the most felt. Forbes reported that since mortgage rates started going up, homeowners in California, where the median home price statewide is $500,000, are already facing additional monthly housing expenses of about $170.

3. Home Sales Are Still Expected to Go Up

While so many of the outlooks for 2017’s housing market sound grim (i.e., rising mortgage rates, disappearing home affordability, and a deregulated Fannie and Freddie, which may or may not be a disaster) many economists are trimming those poor expectations with the silver lining of increased home sales. In a conversation with USA Today, Trulia Chief Economist Ralph McLaughlin showed little worry in the 2017 market. “We think 2017 is going to be another solid year,” he said, caveating “but homebuyers will continue to face headwinds.”

Lawrence Yun, the National Association of Realtors’ head economist, told the publication that the association expects existing home sales to rise 2 percent this year, to 5.5 million, which would represent a post-recession high. Still, the rate of increase would be lower than in 2016.

Ultimately, mortgage rates in 2017 will play a major role in dictating the direction of the housing market, and whether the pool of renters continues to grow or shrink as Millennials make the leap into homeownership. While sales will continue growing with mortgage rates above 4.25 percent, a decrease certainly wouldn’t hurt the homeownership rate.