Interest Rates More Severely Impacting Home Values but Not First-Time Buyers, According to Experts

An expert panel predicts the homeownership rate - led by first-time buyers - will climb above the historic norm within five years, despite rising interest rates.

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Zillow

Jan 10, 2019, 08:00 ET

SEATTLE, Jan. 10, 2019 /PRNewswire/ -- Home values have become more sensitive to changing mortgage interest rates as rates climb back toward historic norms. Years of rates near historic lows have kept monthly payments manageable even as home values were rapidly rising.

That's according to the most recent Zillow^® Home Price Expectations Surveyⁱ. The quarterly survey, sponsored by Zillow and conducted by Pulsenomics LLC, asked more than 100 real estate economists and experts for their predictions about the U.S. housing market, including how the relationship between home values and interest rates has evolved in recent years and affects the housing market.

A majority (58 percent) of panelists said home values today were somewhat or much more sensitive to changing mortgage rates than in years past. Only 15 percent of panelists said home values today are somewhat or much less sensitive to interest rates.

Although mortgage rates have eased recently, they have risen from 4.03 last January to 4.51 this weekⁱⁱ and many market experts expect them to ratchet higher this year. Those rising rates take a big chunk out of buying power – if mortgage rates grow to 5.5 percent, a typical U.S. household looking to spend no more than 30 percent of its income on housing would have to slash its home-buying budget by nearly $35,000 to keep the mortgage payment from rising. The result means buyers on strict budgets have a smaller share of potential homes to consider, and others might stretch their budgets dangerously thin.

"Historically, small movements in mortgage rates have not dramatically shifted the housing market. During previous periods of rising rates – in the mid-1990s and mid-2000s – the housing market remained strong buoyed by a strong labor market and, in the latter case, by lax lending standards," said Zillow senior economist Aaron Terrazas. "But that pattern may not repeat itself. There are strong reasons to believe that the housing market is more responsive to changes in interest rates than in the past – accelerating when rates drop and slowing when rates rise. Mortgage rates hit seven-year highs in November but then fell back in December. If they remain low during the early months of 2019, the housing market could see a modest reacceleration."

Despite that uncertainty, the panelists largely expect first-time buyer activity to increase – and investor activity to decrease – this year, with the homeownership rate climbing above its long-term average in the next five years.

Nearly half the panelists predicted first-time buyer activity would increase somewhat or substantially, with less than a quarter predicting a decrease. The rest said it would remain about the same. Repeat buyer activity, by comparison, was a prediction stalemate, with nearly half saying it would not change much, and an equal 23 percent on either side – predicting it would increase somewhat or decrease somewhat. Research suggests that would-be move-up buyers are particularly constrained in a rising rate environment. More than half of panelists said they expected investment activity to decrease somewhat or substantially in 2019.

Based at least in part on that surge of first-time buyers, an overwhelming 88 percent of panelists said the homeownership rate would be higher in five years than it is now, and 84 percent said it would be higher in two years than it is today. The homeownership rate reached a peak of 69 percent in 2006 but fell to just under 63 percent by 2016, as nearly 10 million homeowners lost their homes to foreclosure during the Great Recession. Since then, it has ticked upward to 64 percent, near the historical average of 65 percent.

"Expectations of higher activity among first-time buyers this year, coupled with projections for diminished activity among individual and institutional investors, are contributing to a favorable outlook for the U.S. homeownership rate," said Terry Loebs, founder of Pulsenomics. "Despite recent price and rate increases, more than eight in 10 experts believe that homeownership in this country will be higher two years from now, and within five years, that it will eclipse the historical average level."

Zillow
Zillow is the leading real estate and rental marketplace dedicated to empowering consumers with data, inspiration and knowledge around the place they call home, and connecting them with great real estate professionals. In addition, Zillow operates an industry-leading economics and analytics bureau led by Zillow Group's Chief Economist Dr. Svenja Gudell. Dr. Gudell and her team of economists and data analysts produce extensive housing data and research covering more than 450 markets at Zillow Real Estate Research. Zillow also sponsors the quarterly Zillow Home Price Expectations Survey, which asks more than 100 leading economists, real estate experts and investment and market strategists to predict the path of the Zillow Home Value Index over the next five years. Launched in 2006, Zillow is owned and operated by Zillow Group, Inc. (NASDAQ:Z and ZG), and headquartered in Seattle.

Zillow is a registered trademark of Zillow, Inc.

Pulsenomics
Pulsenomics LLC (www.pulsenomics.com) is an independent research firm that specializes in data analytics, new product and index development for institutional clients in the financial and real estate arenas. Pulsenomics also designs and manages expert surveys and consumer polls to identify trends and expectations that are relevant to effective business management and monitoring economic health. Pulsenomics LLC is the author of The Home Price Expectations Survey™, The U.S. Housing Confidence Survey, and The U.S. Housing Confidence Index. Pulsenomics^®, The Housing Confidence Index™, and The Housing Confidence Survey™ are trademarks of Pulsenomics LLC.

ⁱ This edition of the Zillow Home Price Expectations Survey surveyed 114 experts between Nov. 5, 2018 and Nov. 19, 2018. The survey was conducted by Pulsenomics LLC on behalf of Zillow, Inc.

ⁱⁱ Based on a 30-year fixed-rate mortgage.

SOURCE Zillow