As mortgage rates rise, the price of homes will also rise. In a recent article, we discussed the potential impact of increasing interest rates on homebuilders and home prices. We also examined the implications of China’s supply chain shortages on home prices. While the changes in interest rates will not have a major effect on home prices in the short-term, they will slow the pace of homebuilding.
Impact of rising mortgage rates on home prices
The increasing cost of a mortgage is making it more difficult for many borrowers to afford a home. In addition to making home ownership less affordable, higher mortgage rates also add hundreds to the monthly payments. Whether you plan to buy a new home or refinance your existing one, knowing about rising mortgage rates can help ease your fears. Rising rates affect every aspect of buying a home. Rising rates mean higher mortgage loan costs, making homes more expensive for buyers and reducing demand.
Rising mortgage rates have a greater impact on existing home sales than on new home sales. Home sales went from 3.7 million in 1993 to 3.9 million in 1994 and then declined to 3.8 million in 1995. In 1996, home sales hit four million, a gain of 8.29 percent. Moreover, rising mortgage rates will have a minimal impact on wages and salaries. However, despite conventional wisdom to the contrary, rising rates will have little or no impact on home prices.
In fact, the Federal Reserve has already signaled that it will hike its short-term interest rates a few times this year. The increased cost of mortgages, along with inflation, is reducing affordability and forcing more sellers to lower their asking prices after listing. This in turn has a negative impact on the real estate market. However, most housing economists expect home prices to continue rising this year and this gap between supply and demand will eventually close.
Impact of rising mortgage rates on homebuilders
While rising mortgage rates will not immediately reduce home prices, they could have a profound impact on homebuilders and the housing market. As prices have not kept up with inflation for years, a rise in mortgage rates could put more pressure on home prices and make homes more expensive. On the other hand, the decline in interest rates made homes more affordable over time. If mortgage rates continue to rise, homebuilders will have to raise prices to compensate for the decreased demand for new homes.
A recent survey by BTIG and HomeSphere showed that only 42% of homebuilders said that rising mortgage rates were negatively impacting their business. However, the survey also found that sales were up for mid-sized and small-sized builders. Most of them raised prices, too, despite the increase in rates. The rise in mortgage rates will likely slow homebuilding, but its immediate impact on the housing market remains to be seen.
While builders have cited shortage of building materials and rising construction costs as a primary cause of their slump in sales, expectations of rising mortgage rates are hitting them harder. The 30-year fixed-rate mortgage was up a full percentage point from a year ago and is rising again. The 30-year fixed-rate mortgage component increased two points to 67. Rising mortgage rates and tight labor markets will be the two biggest factors limiting homebuilding this spring.
Impact of rising mortgage rates on supply chain shortages in China
The recent cases of COVID-19 in China are a troubling development for the world supply chain. The virus could cause higher inflation and dampen hopes for a strong economic recovery in China this year. Because of this, leading manufacturing cities in China, including Dongguan and Shenzhen, have ordered lockdowns. Toyota, a large global company, has already halted production in some of its factories.
Chinese housing regulations have been tightened due to the severe strains placed on the financial system. However, in the last decade, the government has been able to stem the price declines through governmental affordable housing projects. The Chinese government has a strong mortgage enforcement system in place, so the market is relatively stable. Although delinquency rates have been low in some cities, they remain high in cities with weak enforcement of mortgage policies. Additionally, the government’s land supply and price policies have contributed to the high property prices. While the vacancy rates have declined somewhat, the trend of sharp price increases has not changed.