Here’s How Home Prices May Respond to Rising Mortgage Rates

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How will the housing market respond to rising mortgage rates?

So far, it’s been “resilient,” Goldman Sachs economists wrote in a note out Monday. Goldman’s economic activity indexes show that housing’s share of the economy grew above trend from November to January, a period when mortgage rates jumped 60 basis points.

But rising rates may impact the housing market with a lag, the analysts write. Using the 2013 “taper tantrum” as a guide, the post-election jump in rates will likely have the most pronounced effect in the second and third quarters of this year.

The Goldman economists are particularly interested in the effect of rising rates on home prices. Aggregating several previous studies of the impact of a 100-basis point increase in mortgage rates, they determine a median home price decline of 3-4%.

On Tuesday, CoreLogic said its national home price index rose 6.9% compared to a year ago in January, the sixth-straight month of accelerating yearly price gains.

“This median estimate suggests that the recent 60 basis point rise in mortgage rates should, all other things equal, lower house prices by 2-3%,” the Goldman analysts conclude. “This estimate thus supports our forecast that national house prices will continue to rise but at a slower pace in the next few years.”

But all other things are not equal – and that’s what will cause slower price appreciation rather than outright price declines. Most important is that demand is much stronger than supply, both for previously-owned and newly-constructed homes.

What’s more, the economy continues to bolster the housing market. The job market is still strong, asset prices have surged, and consumers have repaired their balance sheets. The housing market is also in a more virtuous cycle: home equity has recovered, mortgage rates remain low enough to be manageable, and high rents make homeownership attractive.

It’s worth noting that many economists doubt that rates will rise much more. The median estimate among experts surveyed by MarketWatch in late December was for an average of 4.5% throughout 2017 – 35 basis points more than the most recent reading.

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