Higher Interest Rates Won’t Stop First-Time Home Buyers, According to Zillow

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 Survey.

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 week 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."

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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.

Find out more at www.zillow.com.