Here’s how a 5% mortgage rate would roil the US housing market

Here’s how a 5% mortgage rate would roil the US housing market

Mortgage rates are now at their highest level in four years and poised to move even higher. The timing couldn’t be worse, as the usually busy spring housing market kicked into gear early this year amid higher home prices and strong competition for a record low supply of homes for sale. Add it all up, and affordability is starting to hurt.

The average rate on the popular 30-year fixed is now right around 4.50 percent, still low when looking historically, but buyers over the past six years have gotten more used to rates in the 3 percent range. Mortgage rates have not been at 5 percent since 2011.

A 5 percent rate would cause more than a quarter of today’s homebuyers to slow their plans. Odds are that 20% of consumers would ensure them to move with more urgency to purchase a home if rates would hit 5%. Chances are big that 20% of home buyers would consider more affordable areas or just buy a smaller home when if rates keep going up.

Despite rate concerns, the bigger issue for buyers is changes to tax laws that had lowered the cost of homeownership. Specifically, the deduction on property taxes is now limited to $10,000. While that does not affect homeowners in the majority of the country, it does hit those in high-cost states like New York, New Jersey and Illinois, and those in higher-priced housing markets like California.

Some have claimed that higher rates and the new tax law will put downward pressure on home prices, alleviating some of the current sticker shock, but other factors are fighting that assertion.

Tight credit, lack of inventory and high demand are the major factors that tell us there’s no housing bubble, despite rapid price increases. There are still many more buyers than the current housing supply can support, with no major relief in sight.

Unlike during the last housing bubble in the mid-2000s, mortgage lenders today are much more strict with regard to the borrower’s ability to repay the loan. They are required by new regulations in the industry to be that way. Higher mortgage rates may mean some borrowers on the margins will not qualify for the size of the loan they need or want.