Housing Demand May Keep Market Afloat, Even if Rates Rise

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How will the housing market handle rising rates?

Ever since the November election, when the unexpected Trump victory sent bond yields flying and mortgage rates following closely behind, analysts have been preoccupied with that question. From overly cautious lending standards to extremely tight inventory, the housing market has plenty of challenges, and any additional constraint won’t help.

But new data from Black Knight Financial Services suggests that demand might be resilient enough to withstand higher borrowing costs in 2017.

The last time mortgage rates spiked was in mid-2013, when then-Fed Chairman Ben Bernanke warned markets that the central bank would shortly begin to unwind its extraordinary stimulus programs. Rates jumped a full percentage point between April and September, and mortgage applications plunged.

So did home price appreciation.

In an illiquid market like housing, it takes time for prices to respond – in this case, until August, when they were rising at an annual rate of 9%. Then appreciation fell every month for over a year until hitting bottom.

When price gains finally starting rising, in early 2015, they kept going. Lower rates helped boost demand, and that was reflected in stronger pricing, said Ben Graboske, Black Knight’s vice president of data and analytics.

It’s worth noting that there’s another factor driving prices up: extremely tight supply. Inventory of previously-owned homes fell to a 17-year low last month, and choices of both existing and new homes have been so scarce that analysts have assumed it will quench demand at some point.

But prices even spiked a bit in the last months of 2016 – even after rates surged post-election. Black Knight doesn’t have December home price data yet, and Graboske cautioned that it’s hard to predict the path of mortgage rates from here on, with so much uncertainty around policy and markets.

If rates go up enough, price appreciation could slow – and possibly even reverse, he told MarketWatch.

But there’s another big question mark hanging over the housing market: the path of regulatory reform. If there are big changes to the 2010 Dodd-Frank law, Graboske said, it could open up lending to far more Americans.

“If you really tap into that new population of potential borrowers that have been renting and paying increasing rents for years that could get really interesting,” Graboske said.

One thing is clear: there’s strong and durable demand for homes to purchase.

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