Higher mortgage rates are expected to put a damper on the housing market's potential along with home price appreciation next year, according to First American Financial Corp.
First American predicts that the home price growth rate could decline by nearly a percentage point by the end of next year due to higher mortgage rates, Mark Fleming, the company's chief economist, said in a news release. Existing-home sales are also expected to go down.
"The 'taper-tantrum' in 2013, which was a larger increase in mortgage rates than we have seen in recent weeks, produced a similar result — a decline in sales activity, but a more pronounced decline in house price appreciation," Fleming said in a news release Monday.
Consequently, the rate increases seen recently could lower the market's ability to meet its full potential.
In November, First American assessed that potential existing-home sales increased 4% year over year to a seasonally adjusted annualized rate of 6.1 million properties. The market underperformed this potential last month by 8.4% or 515,000 sales at a seasonally adjusted annualized rate, an improvement from the underperformance gap of 8.6% in October.
"The market potential for existing-home sales continues to grow based on the strength of the broader economy, particularly wage growth, as well as improving access to credit," Fleming said. "But, the market continues to underperform its potential, primarily a result of persistently tight inventory."
But the changes spurred by higher rates could improve affordability — one factor that has stymied home sales from first-time buyers.
"While rising rates reduce affordability for potential first-time homebuyers, the expected moderation of price appreciation will align house price growth more closely with recently increasing income growth to help offset reduced affordability in the year ahead," said Fleming.
