Rising Interest Rates Still Low by Historical Standards

Mortgage interest rates may well determine the outcome of the year on buyers, sellers and investors.

It's already been clear that 2017 was a banner year for residential real estate sales. But when it comes to projections for 2018 and a spring home sales season that's already underway, certain factors could cause the year to turn out quite differently.

The primary concern for 2018 is not necessarily home prices, although they continue to increase throughout much of the U.S. Instead, mortgage interest rates may well determine the outcome of the year for buyers, sellers and investors.

The causes and effects of rising rates

Interest rates remain relatively low compared to historical averages, but have increased rapidly since the beginning of 2018. As of April 19, the latest report on mortgage rates from Freddie Mac found that average interest rates had jumped to their highest point in four years. The average rate on a 30-year fixed-rate home loan was pegged at 4.47 percent. This news came on the heels of the latest release from the Federal Reserve's Beige Book, a collection of economic analysis that markets often look to for insights on future policy direction. Since the Fed continues to see overall economic growth and employment rates as favorable, it's widely expected that the central bank of the U.S. will keep raising prime interest rates incrementally throughout 2018, and that is now being priced into mortgage rates.

What does this all mean for the average consumer who either owns a home or is looking to make a purchase soon? For the majority of Americans who rely on mortgages to buy property, higher interest rates of course make that prospect more expensive. However, according to classical economic theory, asset prices tend to move in the opposite direction of interest rates. This may explain why researchers, including those at Zillow, anticipate home prices to grow slower in 2018 than the previous year.

Takeaway for owners and sellers

This is not to say that homeowners need to worry about the value of their investment. Nor is it a prediction that real estate sales will choke from rising rates. A report from Freddie Mac expects home price growth to continue outpacing inflation in the coming years. Strong employment and high levels of consumer confidence will keep buyers coming, although those without significant savings may not find a reasonable entry point into the housing market anytime soon. Interest rates are expected to continue rising incrementally through 2018, with the average interest rate on a 30-year fixed-rate mortgage predicted to approach 5 percent by the end of the year. 

"While housing market trends have been generally favorable, not everyone has shared equally in the gains," according to Freddie Mac's most recent report on the U.S. housing market. They point out that besides buyers who have been priced out of certain markets, current homeowners living on fixed incomes may not necessarily welcome higher property values, either. That's because property taxes also tend to increase along with a home's value, creating an additional burden for owners. On the other hand, this could prompt more of them to enter the market as sellers.

The housing market in 2018 is looking complicated, but not bad overall. For many homebuyers and sellers, the same basic fundamentals still apply.