From Fannie Mae:


In July 2013, we wrote an FM Commentary about the impact of rising mortgage rates on the housing recovery.  At that point, rates had risen to 4.51 percent.

We examined the impact of rising rates on home prices and home sales during the two periods since 1990 when the market had experienced a sharp rise in mortgage rates.

The first instance was a 14-month period from October 1993 to December 1994, when mortgage rates increased by 237 basis points (from 6.83 percent to 9.20 percent).

The second instance of a meaningful rise in rates was longer and the rate rise was smaller – a 19-month period from October 1998 to May 2000, when mortgage rates increased by 180 basis points (from 6.71 percent to 8.51 percent).

Based on these past experiences, we suggested that rising rates were more likely to lead to a slowdown in home purchases rather than a decline in prices.

Furthermore, we noted that while in the past a sharp increase in rates on fixed-rate mortgages led to an increase in origination of adjustable-rate mortgages (ARMs), in this instance, a recent regulatory change, the Qualified Mortgage (QM) Rule, would likely mute that response.

Were we right in our July 2013 assessment?

We now have home price and sales data through April 2014. The general pattern is consistent with historical relationships and our expectations in July 2013. Namely, that a sharp adjustment to higher mortgage rates tends to precipitate a reduction in the volume of sales rather than a decline in prices.

As can be seen in Chart 1, rising rates have contributed to a decline in single-family home sales.

From May 2013 to April 2014, mortgage rates rose by 80 basis points (from 3.54 percent to 4. 34 percent).  Over that time period, the pace of single-family existing home sales has declined by 7.7 percent from an annualized level of 4.40 million units in April 2013 to 4.06 million in April 2014.

The pace of sales in April 2014 is down 14.5 percent from the recent high point in July 2013 when sales were running at an annualized rate of 4.75 million units.

chart 1

In April 2013, prior to the onset of the current rise in mortgage rates, national home prices were rising at an annual rate of 11.3 percent, as measured by CoreLogic. Contemporaneous readings from the S&P/Case-Schiller and the FHFA price indices confirmed the strong pace of home price appreciation.

Since April 2013, home prices have continued to rise, but are no longer accelerating (see Chart 2).

The year-over-year change in home prices in April 2014 was 10.5 percent having peaked at 11.9 percent in February 2014 (CoreLogic HPI). The continued strong appreciation in home prices occurred during a period when mortgage rates rose by 80 basis points.

chart 2

Outlook for the Second Half of 2014

Now that the housing recovery has weathered the rise in rates since May 2013 and weak economic growth in the first quarter of 2014, what is the outlook for the rest of 2014?

Our current forecast is for mortgage rates to rise toward the upper end of the range established over the past year as the economy recovers from a soft patch during the first quarter of 2014.

Tight supply and continued strong demand by investors contributed to a rise in home prices in 2013 that was well ahead of the growth in household income. We expect that dynamic to wane over the course of 2014.

The FHFA purchase-only home price index, included in our Fannie Mae Economic & Strategic Research June 2014 Economic and Housing Outlook, forecasts home prices to increase by approximately 5 percent in 2014 after a 7.6 percent gain in 2013.

Despite our expectation for a rebound in home sales from the recent lows witnessed so far this year, we expect total home sales to post a small decline in 2014 compared to 2013—the first retreat in four years.

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