Will Rising Mortgage Rates Squash The Housing Market?

Rising mortgage rates alone will not squash the housing market. Rates will definitely slow exuberance.

The historic spike in mortgage rates instigated chatter across the country that the housing market is a bubble that will soon pop. Mortgage rates made a steep climb recently as markets reacted to a newly-minted hawkish Federal Reserve (Fed). As seen in the chart below, mortgage rates rose to levels last seen in 2011. “Our view is the housing market is not necessarily a bubble, however rising rates will no doubt slow some of the irrational exuberance,” says Jeffrey Roach, Chief Economist at LPL Financial.

Several months ago, a prospective homebuyer would pay $1,347 for a $300,000 loan at 3.50%. If the buyer waited until this week to lock in a new rate at 5.00%, the borrower would pay $263 more per month. For most households, an additional cost of $263 per month will cut into discretionary spending and prospective buyers will reconsider housing options. The initial response to higher rates will be most obvious for first-time prospective home buyers, who will bear the brunt of higher rates. This cohort will likely realign expectations or delay a home purchase altogether.

Those selling a current home could be more adaptable to higher rates, since this cohort can likely offset high costs with existing home equity. Higher cost of funds will likely mean a cut in discretionary items most sensitive to relative price changes. Inflationary periods with high mortgage costs will weigh on the consumer. If rates stay contained, our baseline expectation is the consumer will wade through it.
Here come the Millennials

Long-term demographic trends will support housing. According to the latest data from the National Association of Realtors (NAR), the median age of first-time buyers has risen to 33.[1] The median age of repeat buyers is 55. The wave of millennials coming into peak buying age and high net worth of the boomers will help support the housing market even though mortgage rates and home prices are rising at an extraordinary pace. Wage growth from a tight labor market also provides support in the near-term. Rising median age of repeat buyers, strong household net worth and low financial debt obligations explain why all-cash sales were roughly 30% of U.S. home purchases in 2021. As borrowing costs increase, all-cash sales will likely rise in 2022.

Years of underbuilding are suppressing housing inventory

Inventory of residential homes is at all-time lows according to Redfin Housing Market data. Perhaps some seasoned builders are reluctant to build after experiencing the Great Financial Crisis. The lack of labor and high cost of raw materials is also weighing on builders. Therefore, we expect inventory to remain extremely tight, adding support to housing even during times of rising mortgage rates.

Home ownership is one important aspect of the "Investment House" and comprehensive financial plan that we walk our clients through. Our desire is to be a catalyst and to help our clients make informed and educated financial decisions as they plan for the future.

If you have specific questions related to your own investments or financial planning needs, we welcome you to contact us to set-up time to discuss how we can assist you. 

Source and Disclaimers:

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change. The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. 

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All index and market data from FactSet and MarketWatch.

This Research material was prepared by LPL Financial, LLC.