Will this Sudden Spike in Mortgage Rates Cause a Stall in the Market?

As recent fixed-mortgage rates continue to spike within the past couple weeks, many experts have begun to raise concern about the impact this change will have on the housing market. Although fixed mortgage rates are at a 14 month high, it’s the rate at which these interest rates have increased that is alarming to many experts and professionals.

rising home sales
This could be good or bad news for brokers and agents, depending on how the market responds.

Recently, rates on fixed-mortgages have jumped up to around 4%, the highest we’ve seen since April of 2012. To some, this recent change may be very upsetting, but many people, including researchers at Freddie Mac, believe that the recent change in mortgage rates is nothing to be concerned about. The specialists at Freddie Mac believe that it would take a mortgage rate of at least 7% to prevent most middle class families from affording an average-priced home. Although this increase in mortgage rates may not be enough to prevent the average family from purchasing a new home, it may be enough to deter some first time home buyers.

Rather than worry about current fixed-mortgage rates, many experts have focused their attention on the rate at which this increase has occurred and the impact it will have on home prices. Doug Duncan, Chief Economist at Fannie Mae, believes that with such a sudden increase in mortgage rates, home prices are likely to fall. This is exactly what happened in 1994, when we saw an increase in rates by 2%.

Investor activity will also play a major role in determining home prices in the upcoming months. In some communities, large investors have been purchasing up to 90% of the properties being sold, which has been a major contributor in the increase of home prices. This investor activity will have to slow down at some point though, and increasing mortgage rates may be enough to do this. Once these investors begin to back out, we will surely see a decrease in home prices.

Regardless, it’s not the current mortgage rate which will be affecting home prices the most, but rather the rate at which this change is occurring. It’s common for home sales to slow once mortgage rates rise by 100 basis points, and if mortgage rates continue to increase as they have been, we will surely see an impact within upcoming weeks.

Will this drastic increase push home owners into selling before the value of their home drops? Or will the market stall as it has before? What are your thoughts?

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