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The Home Front

By Don DeBat

25-Feb-18 – Homeownership once was the highly coveted American Dream but rising home-loan interest rates in 2018 may cause that dream to fade, especially among Millennials, experts say.

Before the Great Recession, the nation’s homeownership percentage was a robust 70 percent. Then, beginning in 2006, the squeeze of foreclosures during the downturn caused it to plummet to 62.9 percent in 2016, before rebounding slightly to 64.2 percent in 2017, according to the United States Census Bureau.

U.S. Census Bureau
(Above) Quarterly and Seasonally Adjusted Homeownership Rates for the United States, 1995-2017. Source: U.S. Census Bureau, January 30, 2018. (Click on image to view larger version.)

Young, apartment-renting Millennials, a group of 90 million Americans, posted a dismal 36 percent homeownership rate in 2017. Homeownership was significantly higher among the Old School generations – 75.3 percent for those aged 55 to 64 years – and people age 65 years or older posted a whopping 79.2 percent homeownership rate in 2017.

The slippage of American homeownership was mostly caused by the near decade-long housing recession, but now rising interest rates are a new threat, economists say.

Len Kiefer “History has shown that periods of rising mortgage rates can be challenging for U.S. housing and mortgage markets,” noted Len Kiefer (left), Freddie Mac’s deputy chief economist. “In historical episodes of rising rates, home sales slipped, housing starts stalled, and mortgage originations swooned.”

Kiefer said home builders are doubly affected by increasing mortgage rates because they use financing to fund construction costs.

“When interest rates on funding for new construction and mortgage rates rise simultaneously, home builders are squeezed by a fall in demand and an increase in costs,” he noted.

On February 22, Freddie Mac’s Primary Mortgage Market Survey reported the benchmark 30-year fixed mortgage rate average rose to 4.4 percent from 4.38 percent, increasing for the seventh consecutive week. A year ago, the 30-year fixed loan average was 4.16 percent. In Chicago on February 22, lenders were charging a range of 4.252 to 4.486 percent, reported RateSeeker.

“Thirty-year fixed mortgage rates increased for the seventh consecutive week to the highest level since April of 2014,” Kiefer noted. Experts say mortgage rates have followed the rate rise to 2.9 percent on 10-year U.S. Treasuries in anticipation of higher rates of inflation and further monetary tightening by the Federal Reserve Board. If those increases continue, economists predict 30-year fixed mortgage rates could surpass 5 percent by the end of 2018 and could go as high as 5.5 percent in early 2019.

Some history

Mortgage rates hit a historical rock bottom on November 21, 2012, when the 30-year fixed mortgage average fell to 3.31 percent, Freddie Mac reported.

More than 18 years ago, in August 1999, when many of today’s Millennial home buyers were in grammar school, lenders were quoting 8.15 percent on a 30-year fixed mortgage.

However, to really appreciate today’s historically low interest rates, housing experts say home buyers need only to look at what banks and mortgage lenders where charging more than three decades ago in the early 1980s.

According to Freddie Mac, benchmark 30-year mortgage rates peaked at an astronomical 18.45 percent in October 1981 during the Great Recession of the 1980s.

During the four-year period when rates increased to 18 percent from 8 percent, new mortgage originations fell nearly 40 percent, annual single-family home sales dropped 36 percent, and single-family home starts plummeted more than 51 percent, noted Kiefer.

Home-loan rates fell below 10 percent in April 1986 and then bounced in the 9-10 percent range during the balance of the 1980s.

Archives of the now-defunct Federal Housing Finance Board show long-term mortgage rates were relatively affordable five and a half decades ago at 5.81 to 5.94 percent between 1963 and 1965.

In 1966 and 1967, borrowers paid an average of 6.3 to 6.4 percent. Rates last dipped below 6.5 percent in January 1968, when the national average hit 6.41 percent. Between 1971 and 1977, the now-defunct Illinois Usury Law held rates in the 7.6 to 9 percent range.

Rate spike will mean fewer mortgages, home sales, and new construction

February Insight, a new Freddie Mac analysis which delves into the effects of higher mortgage rates, has forecast the future of home loan interest rates in 2018.

If home-loan rates spike by 1.5 percentage points to the 6.5 percent bracket, mortgage loan originations would fall by 30 percent, and existing home sales and new-construction starts would decline between 5 and 11 percent, Freddie Mac said.

Obviously, home buyers, homeowners wishing to refinance, mortgage lenders, home builders, and real estate agents would feel the pinch under this scenario.

Although rates have moved higher recently, Kiefer said mortgage credit is still historically cheap and he advised borrowers to get in while the getting is good.

“If rates rise, will housing markets follow the historical precedent, or will they buck the trend and maintain momentum?” Kiefer asks. “It’s uncertain, but with a solid labor market, rising household incomes, and a demographic tailwind from a large, young [Millennial] adult population coming of age, U.S. housing markets could show modest growth this year even with higher mortgage rates.”