Rising Mortgage Rates

Dated: 06/12/2018

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SANTA ANA, Calif. – June 12, 2018 – First American Financial Corporation's Real Estate Sentiment Index (RESI) for the second quarter of 2018 finds little likelihood that rising interest rates will impact first-time homebuyer demand until they hit at least 5.6 percent. The RESI is based on a quarterly survey of independent title agents and other real estate professionals.

"Given the strong likelihood of rising mortgage rates in 2018, many savvy real estate market observers are curious how rising rates may impact demand, especially among millennial first-time home buyers," says Mark Fleming, chief economist at First American. "On a national level, the title agents and real estate professionals surveyed believe that mortgage rates would need to hit 5.6 percent – 1.0 percentage point above the current rate – before first-time home buyers withdraw from the market.,"

In addition, the top rate continues to rise. "We asked the same question in the first quarter of 2017, and title agents and real estate professionals cited 5.4 percent as the mortgage rate at which first-time home buyers would withdraw from the market," says Fleming.

The Fed is widely expected to raise the Federal Funds rate multiple times this year, but most mortgage-rate forecasts suggest that they won't top 5 percent, according to Fleming. As a result, "purchase market demand should not be materially impacted by any modest increase in mortgage rates."

Even without a mortgage-rate fear among homebuyers, however, another current market challenge might stop them: A lack of inventory.

"When asked what the primary obstacle to becoming a homeowner was, 35.3 percent of title agents and real estate professionals responded with limited inventory of homes they like," says Fleming. "The second most cited obstacle was overall affordability (30.1 percent), followed by down payment (28.3 percent)."

Title agents and real estate professionals generally expect positive economic news and buyer confidence going forward – a prime reason rising mortgage rates aren't expected to play a significant role in lowering buyer demand. "However, more than a third of title agents and real estate professionals see limited supply as the primary obstacle to first-time home buyers," adds Fleming.

"The title agents and real estate professionals surveyed expect residential house prices to increase by 4.2 percent in the next year. This is up 0.7 percentage points from last quarter, and 0.1 from the previous year," said Fleming. "The expectation for further price appreciation is not surprising, given the market dynamics at play in the housing market today that are preventing more existing homeowners from selling their homes and potentially alleviating some of the supply shortage."

The survey ranked Florida as No. 5 for title agents and real estate professional predictions of annual price growth, predicting a 6.7 percent value increase for Sunshine-State homes. The first four include Nevada (+9.1 percent), Washington (+8.8 percent), Missouri (+6.8 percent) and Tennessee (+6.8 percent)

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