Predicting Rising Interest Rates

Interest rate changes are difficult to predict and many people have questions about how it will affect their investments. It brings up the question of how sensitive the housing market is to rising interest rates.

It is not surprising that home sales remain sensitive to rising interest rates. Even a slight rise could price potential buyers out of the market. Many people want to know what to anticipate especially as we enter the peak home-buying season. Mark Vitner and John Silva of Wells Fargo say they “expect the Fed to begin to nudge the federal funds rate higher in late summer or early fall. Mortgage rates will likely increase ahead of any change in policy rates, but again the timing and magnitude of any increase remains an open question. Mortgage rates typically track the yield on the 10-year Treasury note and that rate is greatly influenced by the expectations for short-term interest rates over the next few years.”

Looking back a couple years when the Fed announced an accelerated end to quantitive easing during the spring buying season, Rick Lombardo of First Capital Mortgage recalls “Mortgage rates rising by 115 basis points in less than eleven weeks, causing the homes sales market to virtually collapse.” Wells Fargo also points out that the “sales of new homes fell 25 percent almost immediately following the “Taper Tantrum”and existing home sales fell roughly 10 percent over the next several months.”

Lombardo says it is no surprise that Wells Fargo’s answer to the question regarding housing market sensitivity is “even a modest rise in mortgage rates will restrain demand for new and existing homes.” However, they also say “home sales should still improve in 2015 due to stronger job growth and increased household formation.”

Even with low rates, the housing market remains sensitive to changes in rising interest rates. The Federal Reserve Bank has made it clear that rates are likely to rise this year. What the magnitude of these changes will be is the question.

Please contact Julie Ellis Lovett for more information on how sensitive the housing market is to rising interest rates.

Rick A. Lombardo