Zillow: Interest Rates Affecting Home Values–But Not Deterring First-Time Buyers
A new survey from Zillow and Pulenomics LLC said the homeownership rate–led by first-time buyers–will climb above the historic norm within five years, despite rising interest rates.
The survey of more than 100 real estate economists reported a majority (58 percent) of said home values today were somewhat or much more sensitive to changing mortgage rates than in years past. Only 15 percent of panelists said home values today are somewhat or much less sensitive to interest rates.
Although mortgage rates have eased recently, they have risen from 4.03 percent last January. The Mortgage Bankers Association in its Weekly Applications Survey that the 30-year fixed rate stood at 4.74 percent, after topping 5 percent late last year.
“Those rising rates take a big chunk out of buying power,” said Zillow Senior Economist Aaron Terrazas. “If mortgage rates grow to 5.5 percent, a typical U.S. household looking to spend no more than 30 percent of its income on housing would have to slash its home-buying budget by nearly $35,000 to keep the mortgage payment from rising. The result means buyers on strict budgets have a smaller share of potential homes to consider, and others might stretch their budgets dangerously thin.”
Despite that uncertainty, panelists largely expect first-time buyer activity to increase–and investor activity to decrease–this year, with the homeownership rate climbing above its long-term average in the next five years. Nearly half the panelists predicted first-time buyer activity would increase somewhat or substantially, with less than a quarter predicting a decrease. The rest said it would remain about the same.
Repeat buyer activity, by comparison, was a prediction stalemate, with nearly half saying it would not change much, and an equal 23 percent on either side–predicting it would increase somewhat or decrease somewhat. More than half of panelists said they expected investment activity to decrease somewhat or substantially in 2019.
“Historically, small movements in mortgage rates have not dramatically shifted the housing market,” Terrazas said. “During previous periods of rising rates–in the mid-1990s and mid-2000s–the housing market remained strong buoyed by a strong labor market and, in the latter case, by lax lending standards.
But that pattern may not repeat itself, Terrazas added. “There are strong reasons to believe that the housing market is more responsive to changes in interest rates than in the past–accelerating when rates drop and slowing when rates rise,” he said. “Mortgage rates hit seven-year highs in November but then fell back in December. If they remain low during the early months of 2019, the housing market could see a modest reacceleration.”
The survey said based at least in part on that surge of first-time buyers, an overwhelming 88 percent of panelists said the homeownership rate would be higher in five years than it is now, and 84 percent said it would be higher in two years than it is today. The homeownership rate reached a peak of 69 percent in 2006 but fell to just under 63 percent by 2016, as nearly 10 million homeowners lost their homes to foreclosure during the Great Recession. Since then, it has ticked upward to 64 percent, near the historical average of 65 percent.
“Expectations of higher activity among first-time buyers this year, coupled with projections for diminished activity among individual and institutional investors, are contributing to a favorable outlook for the U.S. homeownership rate,” said Terry Loebs, founder of Pulsenomics. “Despite recent price and rate increases, more than eight in 10 experts believe that homeownership in this country will be higher two years from now, and within five years, that it will eclipse the historical average level.”
