First American: Rising rates have little impact on housing market

The housing market continued to underperform its potential in April

First American: Rising rates have little impact on housing market

An increase of 25 or 50 basis points in mortgage rates will have little impact on the housing market’s potential, which the market continued to underperform in April, according to the Potential Home Sales Model released by First American Financial.

First American found that the existing-home sales market is underperforming its potential by 6.5%, or an estimated seasonally adjusted annualized rate of 392,000 sales. The gap decreased by an estimated 39,000 sales from March.

April also recorded an increase in potential existing-home sales to a 5.99 million seasonally adjusted annualized rate. The current potential increased by 1.9% compared with April 2017, representing a gain of 114,000 sales.

First American Chief Economist Mark Fleming said the continued underperformance primarily reflects the lack of supply of home for sale. While inventory levels remain at historically low levels in most markets, millennials are driving continued growth in demand.

“One reason housing supply remains limited is because the majority of existing homeowners have 30-year, fixed-rate mortgages with historically low rates. Now that rates are rising, they are hesitant to sell their homes because there is less incentive to sell,” said Fleming.

While a majority of existing homeowners appear to be rate-locked in the historically low rates of their 30-year fixed-rate mortgages in the rising rate environment, Fleming said rate increases of 25 or 50 basis points have actually little impact on market potential.

“According to our Potential Home Sales Model, if the 30-year, fixed-rate mortgage increases another 25 basis points, market potential for existing-home sales would fall by 11,500 sales. If the mortgage rate increased by 50 basis points, the market potential for existing-home sales would fall by 23,000 sales,” Fleming said. “While both increased rate scenarios reduce the market potential for existing-home sales, the reduction is small compared with the overall market potential for existing-home sales – almost 6 million sales.”