Home Sales Will Keep Growing, Even If Rates Rise. Here’s Why:
While mortgage rates have been rising lately – in tandem with climbing 10-Year Treasury yields – most housing experts think home sales will remain brisk this year as rates remain low by historical standards and inventory stays tight.
- Mortgage rates have increased in six of the last eight weeks, as the benchmark 30-year fixed-rate mortgage climbed above 3% to its highest level since September 2020, said the Mortgage Bankers Association.
- Due to higher mortgage rates, overall refinance activity (when terms of an existing loan are revised) fell by 11% last week to their lowest level since December 2020, but were still 50% higher than a year ago.
- The average loan size of purchase applications increased to a record $418,000 last week – up from $347,800 at this time last year.
- The severe weather in Texas led to a 40%-plus drop in both purchase and refinance applications last week in the Lone Star state.
- Meanwhile, the 10-Year Treasury yield (which is correlated with the 30-Year Fixed-Mortgage Rate) has almost tripled to 1.458% on Thursday from a low of 0.515% in early August.
Joel Kan of Mortgage Bankers Association (MBA) says rising mortgage rates – in tandem with climbing Treasury yields – indicates the market and public are increasingly optimistic about the likelihood of an economic recovery. Greg McBride, chief financial analyst at Bankrate.com, notes that in 2020, when the economic outlook was poor and inflation was falling, Treasury yields and mortgage rates fell to record lows. Now that expectations of a post-pandemic economic surge are taking hold, bond yields and mortgage rates are retracing some of last year’s decline.
“The passage of President Biden’s $1.9-trillion stimulus package will likely add to this optimism, thereby pushing mortgage rates higher,” Kan notes. However, Kan points out that mortgage rates, as measured by the 30-Year Fixed Rate Mortgage benchmark, remain at historically low levels. “This rate fell below 3% for the first time in history last fall, and we’re still at around 3% now,” he says. “Even if the rate rises to 3.4% by the end of this year – as MBA forecasts – it will still be moderate by historic standards.”
Indeed, for context, the rate on the 30-Year Fixed Rate Mortgage averaged about 4% between 2010 and 2020, Kan points out. “Back in the 1980s, it was over 10%,” he adds. As such, Kan does not think rising mortgage rates will put a crimp on home sales this year, citing that inventory levels remain fairly tight. “However, rising mortgage rates could affect the timing of new purchases, as buyers might wait a little longer to see if rates ease somewhat,” he says. McBride cites that an improving economy is a “recipe” for strong home sales. “Whether rates are 3%, 3.5%, or even 4% matters less than whether prospective home buyers are confident in their jobs, income, and ability to make future mortgage payments,” he says. “Higher rates will take some momentum away from home sales, so the market might just be ‘sizzling’ instead of ‘red hot.’”
WHAT TO WATCH FOR
As of now, MBA expects sales of existing homes to average about 6.4 million in each of the four quarters of this year (generally in line with sales recorded in the last two quarters of 2020), while sales of new homes should rise from 905,000 in the first quarter of this year to 979,000 in the fourth (above last year’s figures). McBride points out that housing inventory has been “super tight” even before Covid and that demand has exceeded supply “for awhile.” “[It] just takes [homebuilders] awhile to ramp up that production,” he adds. But McBride also observes that continued limited inventory may actually pose a slight impediment to home sales – despite still low mortgage rates, as “would-be homebuyers are sidelined if they can’t find homes for sale in their price range.” Indeed, according to the National Association of Realtors, the U.S. median home price was $303,900 in January, an increase of 14.1% from a year earlier.
Maria Fregosi, chief investment officer at Homepoint Financial, a wholesale mortgage lender based in Ann Arbor, Mich., says if mortgage rates continue to climb, companies that keep their mortgage servicing rights [a contractual agreement where the right to service an existing mortgage is sold by the original mortgage lender to another party] may benefit. “Typically, the mortgage servicing asset increases in value as rates go up, as fewer customers are looking to refinance,” she explains.