Over the last 30 years home sales have declined in only two of the six times that mortgage rates rose significantly.

First American’s proprietary Potential Home Sales Model measures what the healthy market level of home sales should be based on economic, demographic, and housing market fundamentals.  For the month of November, the main takeaways were: potential existing home sales decreased to 6.26 million annualized rate (SAAR), representing a 79.5% increase from the market potential low in February 1993. However, the market potential for existing-home sales increased 7.2% year-over-year, a gain of 422,000 (SAAR) sales. Currently, potential existing-home sales is 533,000 (SAAR), 7.9% below the pre-recession peak of market potential, which occurred in April 2006. 

“Demand for homes was strong prior to the pandemic,” said Mark Fleming chief economist at First American, “then housing demand accelerated amid the pandemic as buyers wanted more space, enjoyed more geographic flexibility in where they could live, and benefited from increased house-buying power driven by record-low mortgage rates. While many of these factors will remain consistent in 2022, mortgage rates are widely expected to rise, so how will that impact home sales?”

Fleming explains that existing-home sales don’t always slow down when mortgage rates rise and are often more influenced by why mortgage rates are rising. “Looking back over almost 30 years, there have been six significant rising-mortgage rate eras,” said Fleming. “Rising mortgage rates led to declining existing-home sales in two of the six rising-rate eras.” Overall, Fleming demonstrates through these examples that existing home sales are resilient in a rising-rate environment. “For example,” he says, “mortgage rates spiked in the summer of 2013 when the Fed indicated it would taper its quantitative easing policy of buying Treasury bonds and mortgage-backed securities. But this ‘taper tantrum’ had no negative impact on existing-home sales.”

Source: National Mortgage Professional