Rising mortgage rates are unlikely to weigh on the home purchase market in the spring as they are offset by positive factors such as increased household formation and an improving economy, a report by First American predicts.
The number of potential sales of existing properties reached 6.26 million units seasonally adjusted on an annual basis in February, an increase of 1.3% compared to January and 12.2% compared to February 2020.
This was the highest level of potential sales since the boom era of 2007 and occurred amid the largest increase in mortgage rates since October 2019 compared to the previous month, said first American chief economist Mark Fleming.
However, rising rates have not been the biggest barrier to larger potential home sales. Instead, it was the growing average tenure of homeowners that dampened the numbers.
"However, the move away from the still rising purchasing power of homes, loose credit standards and high household education outweighed the negative effects of limited new and existing supply," Fleming said in a press release. "As the spring home buying season begins, this dynamic will support the continued strength of the real estate market."
Looser credit standards for some products have been the biggest driver of the spike in potential home sales, adding 41,000 units month-over-month. The growth in household formation drove First American's calculations at nearly 13,000 home sales, and the appreciation in home prices added 34,000 units.
Rising mortgage rates make a potential seller less likely to put their home on the market.
"Most existing homeowners have historically low interest rate mortgages and there is limited incentive to sell if it costs them more to borrow the same amount of money each month," Fleming said. "While rates today are only marginally higher than the lows of 2.68% last December, that spike can leave existing homeowners still feeling 'stuck', which is keeping them from selling their homes, and prevents more supply from reaching the market. "
And that breaks the cycle, he went on, noting that the existing homeowner is both a potential seller and buyer and they may not act to list their home if they are concerned about not finding a better property to buy.
Still, Fleming is optimistic about the future of the real estate market. "The economy is likely to continue to improve as vaccine adoption speeds up," he said. "With higher vaccination rates, consumer and lender confidence will increase, as will a stronger job market."
Although housing starts in February were lower than in the previous month, they are well above the levels of recent years, suggesting that builders should reduce the shortage of inventory over the long term.
"But now? Expect continued strong demand and scarcity, which means the spring home buying season will develop at an unprecedented rate of sales," said Fleming.