This post was originally published on this site
Interest rates are rising quickly, and that has some worried about the effect that movement will have on the U.S. real-estate market. But one analyst suggests that investors should take a deep breath.
The 30-year fixed-rate mortgage averaged 3.02% for the week ending March 4, up five basis points from the previous week, Freddie Mac reported Thursday. It’s the first time since July 2020 that the benchmark mortgage rate has risen above 3%.
The 15-year fixed-rate mortgage, meanwhile, remain unchanged on a weekly basis at an average of 2.34%. The 5-year Treasury-indexed adjustable-rate mortgage averaged 2.73%, down 22 basis points from the previous week.
This rise in rates is a reflection of movements in the bond market. In February, U.S. Treasuries notched the largest monthly surge in yields since former President Donald Trump won the 2016 election.
As bond yields have risen in 2021, so too have mortgage rates. “With the U.S. president indicating that there should be enough COVID vaccines available for every American by May, and the U.S. House of Representatives passing additional stimulus in the latest bill, investors retreated from the bond market, driving interest rates higher,” said George Ratiu, senior economist at Realtor.com.
Typically, mortgage rates roughly follow the direction of long-term bond yields, particularly the 10-year Treasury yield TMUBMUSD10Y, 1.567%.
“Although there is clearly a directional relationship between Treasury yields and mortgage rates, the relationship is not linear as the spread between Treasuries and mortgage rates can be volatile and is influenced by a number of factors,” Jonathan Woloshin, real-estate and lodging analyst for the Americas at UBS Financial Services UBS, +1.49%, wrote in a new research report.
A year ago when concerns about the COVID-19 pandemic were reaching a fever pitch, the relationship between mortgage rates and Treasury yields did weaken. When the refinancing boom first began last year as mortgage rates fell to record lows, lenders struggled to meet the demand.
As a result, some lenders opted to increase rates to dissuade new applicants from joining the mix so that they could work through their existing pile of applications.
Now, mortgage rates are rising quickly, with the 30-year fixed-rate mortgage having gained more than 30 points since the low recorded in January.
“Investors are beginning to wonder if the smoke of rising interest rates will lead to cold water being thrown on the housing market,” Woloshin wrote.
But in his report, Woloshin argues that fears of a rate-driven housing downturn may be overplayed. In his view, the median home buyer would be able to handle an increase in mortgage rates of between 75 and 100 basis points (100 basis points equates to 1%.)
“ ‘The knee-jerk reaction from many market participants and the media is that any increase in mortgage rates spells doom for the housing market.’ ”
Home buyers’ flexibility right now is a reflection of how far mortgage rates have fallen. The current average rate on the 30-year fixed-rate mortgage is still well below the 20-year average of 4.9%, Woloshin noted, citing Freddie Mac FMCC, -0.56% research. Today’s low-rate environment provides a cushion for home buyers.
“The knee-jerk reaction from many market participants and the media is that any increase in mortgage rates spells doom for the housing market,” Woloshin wrote. “Although we are always mindful of the impact rising mortgage rates can have on buyer psychology and finances, it is important to understand what the true magnitude of an increase in rates means for one’s monthly payment.”
To illustrate his point, when you take a median-priced existing home worth $308,300 with a 10% down payment, a jump in mortgage rates to 4% would only increase the monthly payment by $117.
Similarly, he calculated how much less a buyer could afford if they wanted to keep their monthly payments the same at that higher interest rate. In this scenario, the home buyer could afford a maximum monthly mortgage payment of $1,355 at a 3.25% interest rate, with a 10% down payment.
If rates rose to 3.75%, the buyer would either need to increase their down payment to 15% or reduce the amount spent on the home to $325,000 to maintain that same mortgage payment, Woloshin calculated.
These considerations similarly applied to more expensive real-estate markets. “Even assuming a 10% down payment, we believe that even higher-priced homes well in excess of the median U.S. price could largely withstand an increase in mortgage rates of at least 75 basis points,” he wrote.
Others have taken a more cautious view of the market right now. Data from the Mortgage Bankers Association has shown a decline in mortgage applications, including for loans used to purchase homes. “Recent rises in mortgage rates appear to be dampening homebuyer enthusiasm,” Realtor.com chief economist Danielle Hale recently said, citing the application data. “Rising rates and rising home prices amid a short supply of homes will undoubtedly challenge many homebuyers.”
Woloshin said he was operating under the assumption that rising rates would stem the tide of skyrocketing home prices.
“We believe continued increases in mortgage rates will help slow the pace of home-price appreciation, something that would actually be a positive for longer-term health of the housing market, in our view,” he said.
