While the Federal Reserve announced an increase in the benchmark federal funds rate on Wednesday, despite rising borrowing costs, experts don’t believe the housing market will be negatively affected.
Housing can still perform well amid rising mortgage rates, according to First American Chief Economist Mark Fleming.
“Over the last 25 years, there have been seven significant rising-rate eras,” Fleming wrote in a blog post. “Home prices seem even more resistant to rising mortgage rates. Apart from the 1993-94 rising-rate period, when house prices declined ever-so slightly and briefly, house prices have always continued to rise, albeit more slowly, when rates have increased.”
Even though the Fed has been steadily increasing the federal funds rate, interest rates remain relatively low. Wednesday marks the fourth interest rate hike of 2018, with two more expected in 2019.
Recent market volatility has led to bond yields falling, which pushed the 30-year mortgage rate to a three month low. Mortgage applications saw a pop, before a slowdown hit due to the recent stock market drop, per MBA.
Further, at a time when investors are worried about the prospect of a coming recession, some say the housing market will be a safe haven – despite its role in precipitating the 2008 financial crisis.
“Because of the fact that it has been underperforming during the economic recovery, there is less room to go down,” Lawrence Yun, chief economist at the National Association of Realtors, told FOX Business. “I think the housing market would not see any big negative hit if there was an economic recession.”
Yun said in the event of a recession, interest rates are likely to decline, while the Federal Reserve could halt rate increases and even cut some short-term interest rates – making borrowing easier for investors.
While the U.S. economy has undergone a healthy recovery – with the unemployment rate currently sitting at 3.7 percent and GDP rising 3.5 percent in the third quarter – the housing market recovery has remained much more muted.
Recent housing data shows sales are stagnant as supply restrains first-time buyers and prevents current homeowners from looking for new properties. In October, pending home sales fell 2.6 percent – the tenth consecutive month of annual declines.
The inventory crunch has also pushed home prices, and values, higher.