Despite rising mortgage rates, a strong home sales season lies ahead

Rising mortgage rates are not expected to drag on the spring home purchase market, as they will be outweighed by positive factors such as increased household formations and an improving economy, a report from First American predicts.

The number of potential existing home sales in February reached 6.26 million units on a seasonally adjusted annualized rate, up 1.3% from January and 12.2% when compared with February 2020.

This was the highest level for potential sales since the boom era of 2007, and it took place amid the largest month-over-month rise in mortgage rates since October 2019, First American Chief Economist Mark Fleming pointed out.

But rising rates weren’t the biggest obstacle to greater potential home sales. Instead, it was the ever-lengthening average tenure that homeowners remain in place that put a damper on the numbers.

However, "the lift from still rising house-buying power, looser credit standards, and strong household formation outpaced the negative impact from limited supply, both new and existing," Fleming said in a press release. "As we enter the spring-home buying season, these dynamics are poised to support continued strength in the housing market."

Looser credit standards for some products boosted the increase of potential home sales most, adding 41,000 units on a month-over-month basis. The growth in household formation added nearly 13,000 home sales to First American's calculations, and home price appreciation contributed 34,000 units.

Rising mortgage rates will make it less likely that a potential seller would put their home on the market.

"Most existing homeowners have mortgages with historically low rates, and there is limited incentive to sell if it will cost them more each month to borrow the same amount of money," said Fleming. "While rates are only marginally higher today than the rock-bottom rates of 2.68% in December of last year, this increase can still leave existing homeowners feeling 'rate locked-in,' disincentivizing them from selling their homes and preventing more supply from reaching the market."

And that interrupts the cycle, he continued, noting that the existing home owner is both a potential seller and buyer and they might not act to list their home if they fear they can't find a better property to buy.

Still, Fleming is bullish on the future of the housing market. "The economy will likely continue to improve with vaccine rollouts accelerating," he said. "With greater vaccination rates will come increased consumer and lender confidence, and a stronger labor market."

Even though housing starts were lower in February than the month before, they are well above levels of recent years, indicating that home builders should alleviate the inventory shortage in the long run.

"But now? Expect continued strong demand and short supply, which means the spring home-buying season will be moving with a sales velocity that has not been seen before," Fleming said.