With mortgage rates spiking in the past week, I have been scratching my head as to how this will impact home sales. My first thought was “this will kill the momentum!” – but after a bit of reflection – I am now thinking that “this will be great for the market!!”
The past year has seen a great rebound in home prices – Core Logic reports that nationwide, home prices were up over 12% from last May. This increase has been due to the large imbalance in the number of homes available vs. the number of buyers – basic supply-demand issues – which were fueled in part by the low rates and an improving economy (previous post on Hot Market).
As sales activity rampped up in March, April and May – potential sellers started waking up to the reality that pricing has recovered to peak levels, and now they can get the price they want for their home. The price increases also lifted many potential sellers up from underwater, allowing them to sell able to move. Inventory levels started to increase in May and June, but the supply/demand imbalance still exists.
Then, the Fed announces their intentions and rates spiked last week.
Some say the spike will abate, and rates should tick back down a bit, which I think may be the case – but regardless, the days of sub-4% rates are probably gone. But…rates are still sub-5% – which is ridiculously low by historical standards.
So why will this rate increase be great for the market????
I think rates increases will encourage potential buyers and up-grade sellers to enter the market to take advantage of the low rates before they are gone – it will stimulate additional home buying activity.
This should keep the increased demand/limited supply environment in place. Seasonally, supply has probably peaked for the year as we head into July. The rate increase will fuel demand, which will continue to outstrip supply – and home prices should continue their upward trend as a result.
As home prices continue their upward trend, more sellers will be able to take advantage of the market and sell. Ultimately, maybe as we head into next Spring and as rates creep up, this should bring the market back into a normal supply/demand environment, and pricing should level off, or continue to escalate at a more traditional rate.