Mortgage rates recently surged.
From 3.6% on November 11, the average 30-year mortgage rate jumped to almost 4% on November 14.
“This is a classic exogenous shock,” said Mark Fleming, the chief economist at First American.
“We had a rate path, and now there’s a new rate path.”
On Thursday, a report from the Mortgage Bankers Association’s showed that purchase and refinancing applications fell to the lowest level since January. The index that measures this activity fell 9.2% in the week ended November 11.
Low mortgage rates after the 2008 housing crash made the dream of owning a home a reality for many. But if the trend of the last two weeks continue, higher rates could have ripple effects across the housing market.
It all started after President-elect Donald Trump won the US election.
One of Trump’s big plans is a fiscal-spending splurge: big investments in infrastructure, and cuts to the US’ towering corporate tax rates.
This plan could jump start growth and inflation, and it’s the latter that rocked mortgage rates. Higher inflation expectations triggered a sell-off in bonds, which push up interest rates when they fall.
Fleming told Business Insider that this jump in rates means “absolutely nothing” for two-thirds of existing households — the share of homes tied to a fixed 30-year mortgage.
But any impact from rate increases will be felt the most by anyone that wants to buy a home, especially the one-third who are renting.
Rising interest rates could make borrowing more expensive for them, slowing demand, which in turn could raise prices.
Fleming bumped down his 2017 forecast for existing-home sales — where most activity happens — by 200,000 to a 5.45 million rate after the spike in mortgage rates.
“The mortgage market is now at a very important inflection point, with both call and extension risk coming into play,” said Scott Buchta, the head of fixed income strategy at Brean Capital, in a recent note to investor clients. By call risk, he’s referring to the chances that bond issuers redeem their mortgage-backed security before it matures. Extension risk implies that if rising rates slow down prepayments because people are not refinancing their homes, the expected maturities of securities could lengthen.
Higher mortgage rates could also impact affordability. Existing homeowners who locked in low rates while the Federal Reserve kept them down for years after the crisis would have few financial incentive to move. That would keep their houses off the market.
“I have big concerns about where we find the inventory for sale as we move into a higher rate environment,” Fleming said.
From a macroeconomic perspective, rising rates are still “not necessarily a reason to throw in the towel on housing,” said Tom Porcelli, the chief US economist at RBC Capital Markets.
For one, it takes a while before the drop in mortgage applications shows up in home sales numbers.
Also, if higher rates discourage some prospective buyers, that could be offset by a slowdown in the pace of house-price growth because of lower demand.
“If the increase in rates is happening for the “right” reasons, i.e., rising growth prospects, then the generally better backdrop would significantly offset any increase in mortgage costs,” Porcelli said.
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