A spike in mortgage rates is expected to decrease affordability for the coming year, according to Freddie Mac’s November 2016 Outlook released on Wednesday.
Sean Becketti, Chief Economist with Freddie Mac, reflected on previous years and described the components that will be affected by increasing mortgage rates.
"Much like in 2013, we expect housing markets to respond negatively to higher mortgage rates—they will drive down homebuyer affordability, dampen demand and weaken home sales, soften house price growth, and slow the growth in new home construction,” he said. “Mortgage market activity will be significantly reduced by higher mortgage rates, especially refinance originations, which are likely to be cut in half."
The report found that the Federal Open Market Committee will more than likely push short-term interest rates higher more than once in 2017 due to the increase in employment and the rise of inflation. The unemployment rate is expected to decrease to 4.7 percent by the end of 2017. Len Kiefer, Deputy Chief Economist at Freddie Mac, says increased wages and a lower unemployment rate are factors that will combat high mortgage rates.
“The labor market has been near full employment for over a year now, with the national unemployment just below 5 percent. Job growth remains robust [adding over two million jobs year-over-year for the 5th consecutive year] and we’re starting to see signs of modest wage increases,” Kiefer said. “We expect the unemployment rate to drift down throughout 2017 as the economy continues to add more jobs. We’re also looking to see some modest wage increases giving potential homebuyers more buying power and partially offsetting the impact of higher mortgage rates.”
Home sales are slated to decline more than 200,000 units from 2016 to 2017. Although new home sales are increasing, it will not be enough to neutralize declines with existing home sales. Potential homebuyers will be forced to deal with high interest rates and increasing home prices.
“Prospective homebuyers, including many millennial first-timers are going to face increased challenges in 2017,” Kiefer said. “Higher mortgage interest rates and higher home prices are putting the squeeze on homebuyer affordability. One positive for millennials is that the robust pace of home price appreciation has lifted many current homeowners out of negative equity. As house price appreciation continues, more and more homeowners may opt to list their home, if they can find a suitable new home. This should help to provide some additional supply of for-sale homes for first-timers.
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