• February 3, 2023

Mortgage rates soar above 3% — how high can they go before they scare off homebuyers?

Interest rates are rising rapidly and that has some concerns about the impact of the move on the US housing market. However, one analyst suggests that investors take a deep breath.

The 30-year fixed-rate mortgage averaged 3.02% for the week ended March 4, up five basis points from the previous week, Freddie Mac reported Thursday. It is the first time since July 2020 that the reference mortgage rate has risen above 3%.

The 15-year fixed-rate mortgage remains unchanged at an average of 2.34% per week. The 5-year floating rate Treasury index mortgage averaged 2.73%, down 22 basis points from the previous week.

This rise in interest rates reflects the movements in the bond market. US Treasuries in February achieved the largest monthly increase in earnings since former President Donald Trump won the 2016 election.

With the rise in bond yields in 2021, so too have mortgage rates. “With the US President’s advice that enough COVID vaccines should be available for every American by May, and the US House of Representatives, who gave additional impetus in the latest bill, investors pulled out of the bond market and drove interest rates in the amount, “said George Ratiu, Senior Economist at Realtor.com.

Typically, mortgage rates roughly follow the direction of long-term bond yields, especially 10-year government bond yields
TMUBMUSD10Y, 1.567%.

“While there is clearly a directional relationship between government bond yields and mortgage rates, the relationship is not linear because the dispersion between government bonds and mortgage rates can be volatile and influenced by a number of factors,” said Jonathan Woloshin, real estate and lodging analyst for America at UBS Financial Services
UBS, + 1.49%,
wrote in a new research report.

A year ago, when concerns about the COVID-19 pandemic reached a fever level, the relationship was up between mortgage rates and treasury returns has weakened. When the refinancing boom first started last year, when mortgage rates fell to record lows, lenders struggled to meet demand.

As a result, some lenders decided to raise interest rates to discourage new applicants from joining the mix so they can work through their existing application batch.

Now mortgage rates are rising rapidly, and the 30-year fixed-rate mortgage is up more than 30 points since the January low.

“Investors are starting to wonder if the smoke from rising interest rates will throw cold water on the property market,” Woloshin wrote.

In his report, however, Woloshin argues that fears of an interest rate-driven housing downturn may be masked. In his view, the mid-range home buyer would be able to handle a rise in mortgage rates of between 75 and 100 basis points (100 basis points equals 1%).


“The reaction of many market participants and the media is that an increase in mortgage rates is doomed to the real estate market.”

– Jonathan Woloshin, Americas Real Estate and Accommodation Analyst at UBS Financial Services

The current flexibility of home buyers reflects how far mortgage rates have come down. According to Woloshin, citing Freddie Mac, the current average interest rate for the 30-year fixed-rate mortgage is still well below the 20-year average of 4.9%
FMCC, -0.56%
Research. Today’s low interest rate environment provides a cushion for home buyers.

“The reaction of many market participants and the media is that any rise in mortgage rates will doom the real estate market,” wrote Woloshin. “While we are always aware of the impact rising mortgage rates can have on buyer psychology and finances, it is important to understand what the true magnitude of a rate hike means on the monthly payment.”

To make his point, if you were to take an existing home at an average of $ 308,300 with a 10% down payment, increasing the mortgage rate to 4% would only add $ 117 to the monthly payment.

Similarly, he calculated how much less a buyer could afford if they wanted to keep their monthly payments the same at that higher rate of interest. In this scenario, the home buyer could afford a maximum monthly mortgage payment of $ 1,355 at 3.25% interest and a 10% down payment.

If interest rates rose to 3.75%, the buyer would either have to increase their down payment to 15% or reduce the amount spent on the home to $ 325,000 to maintain the same mortgage payment, Woloshin calculated.

These considerations also applied to more expensive real estate markets. “Even assuming a 10% down payment, we believe that even higher-priced homes well above the US average can largely withstand a 75 basis point rise in mortgage rates,” he wrote.

Others have been more cautious about the market at the moment. Mortgage Bankers Association data shows a decline in mortgage applications, including loans used to buy homes. “The recent hikes in mortgage rates seem to be dampening homebuyer excitement,” said Danielle Hale, Realtor.com chief economist recently saidciting the application data. “Rising interest rates and soaring property prices with a tight home supply will undoubtedly challenge many homebuyers.”

Woloshin said he believed rising interest rates would stem the tide of skyrocketing house prices.

“We believe that a sustained rise in mortgage rates will help slow the pace of property price appreciation, which we believe would actually be beneficial for the longer-term health of the property market,” he said.

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