Mar 062018

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By G. Steven Bray

With mortgage rates up about 3/4 of a point since last fall, industry waggers are starting to wonder how higher rates are going to affect the housing market. The conclusions of a recent survey by Redfin say not much.

Redfin asked prospective homebuyers what they would do if rates rise above 5%. Only 6% said they would stop looking for a home. An additional 27% said it would slow their plans. However, that was almost balanced by the 21% who said it would speed up their search, and another 21% said they would keep looking, but would look at cheaper homes.

This result indicating higher rates will have a limited effect is consistent with historical evidence. Freddie Mac reviewed the six instances since 1990 that mortgage rates have risen at least 1%. On average, existing home sales fell only 5% and housing starts fell 11%. During one period, sales and starts actually rose.

The conclusion is that rising mortgage rates by themselves have a limited effect on the demand for homeownership. Home seekers at the margins, especially first-time homeowners, may no longer be able to qualify, but most potential homebuyers just adjust their plans and keep looking for their dream homes.

One note: the Freddie review didn’t consider instances of rising mortgage rates coupled with rapidly rising home prices, the situation that exists in a number of metro areas today.

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