High interest rates got you down? For the first eight weeks of 2018, mortgage rates have steadily risen, causing potential homebuyers to wonder how high they can go.
If they do continue to rise, as expected, what will be the effects on home buyers, homeowners wishing to refinance, mortgage lenders, home builders, and real estate agents? In our most recent Insight, we look at periods when interest rates spiked and analyze the effects, with the hopes of understanding what might happen in the coming years.
The most dramatic increase in mortgage rates in the last 50 years came during a four-year period ending in 1981, when rates increased from 8% to 18%. This hit the industry hard, causing;
That's certainly scary, but since 1990, no episode has matched the magnitude of that rate increase. Still, any significant increase in rates are almost always accompanied by reductions in mortgage originations, home sales, and housing starts across the board.
Let's take a look at how this affects borrowers and mortgage lenders, to real estate agents and home builders.
Based on prior experience, if rates continue to hover between 3.5 and 4.5% and inflation remains low, expect originations, home sales and housing starts to each increase by 5-10% in 2018. But if interest rates push even higher, things get tricky for homebuyers, who will have to decide whether to take the plunge into homeownership despite the increased hit to their wallet, or stay where they are and wait for rates to improve. That could cause originations to drop to as much as 50%, which would obviously have a ripple effect throughout the industry.
For now, even though rates have been rising in recent weeks, they remain historically low compared to the averages over the last four decades.