Higher interest rates raising concerns about home prices in 2017

by Michael Mata29 Dec 2016

Throughout 2016, housing prices in the United States increased by about 5% year-over-year, adding to the cumulative gains made since the lows of 2011. According to the S&P CoreLogic Case-Shiller US National Home Price Index, home prices now stand above the pre-crisis peak nationally.

However, the recent trend toward higher interest rates is raising concerns about the outlook for home prices going into 2017. Indeed, rising interest rates are eliciting mixed responses from borrowers, ranging from panic to resilient optimism.

Post-election interest-rate movement has been significant and quick, on a scale that mirrors the “Taper Tantrum” of 2013 when the Federal Reserve used tapering to gradually reduce the amount of money that the US Treasury was feeding into the economy.

During the Taper Tantrum episode, the mere telegraphing by Fed officials that the end of monetary easing was imminent (amid an uncertain outlook for growth) upset financial markets globally. Equities suffered alongside credit as markets traded lower. As bond spreads moved out, lending conditions tightened in the mortgage market, and as a result, existing home sales declined and new home sales stalled.  

In this most recent rate rise episode, however, equities are moving higher and credit appears to be narrowing. The key difference in this episode versus the Taper Tantrum are very positive growth expectations, driven by the prospect of lower tax rates, lower regulations, and increased infrastructure spending. 

While higher rates have thus far had a relatively benign effect on financial markets, they have led to an increase in mortgage rates. Higher mortgage rates can decrease housing affordability. This in turn has the potential to lower the demand for home purchases.


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