Rising mortgage rates not likely to crimp existing home sales

Existing home sales activity is more influenced by the causes behind mortgage rates rising, not just simply that they have gone up, a report from First American said.

In the past 30 years, mortgage rates rose significantly six times. In two of those periods, the higher rates caused existing home sales to decline.

Back in 2005 and 2006, prior to the start of the financial crisis, the rate increase was driven by the Federal Reserve's actions to curb inflation, Mark Fleming, First American's chief economist, pointed out in a press release.

"The Fed's moves worked, as existing-home sales declined by more than 12% in approximately one year," said Fleming. "Existing-home sales also decreased in the 1994 rising-rate era, as the Fed increased the federal funds rate to prevent strong economic growth from feeding inflation."

On the other hand, during the 2013 taper tantrum, when rates rose because the Fed indicated it wanted to end its quantitative easing program, it had no effect on existing home sales.

"Most recently, in 2017, it took almost a year of rising rates, before the pace of existing-home sales declined below the pace of sales seen before rates started to rise," said Fleming. "Context matters and each rising-rate era is different."

The current interest rate environment is driven by the economic recovery following the upheaval related to the pandemic.

"Rising mortgage rates don't change the other key housing market fundamental — strong millennial home buyer demand, which will continue to underpin the 2022 housing market," Fleming said.

Potential existing-home sales decreased to 6.26 million units on a seasonally adjusted annualized rate in November, a 0.3% month-over-month decrease, First American said. But the market potential is 422,000 SAAR units or 7.2% higher than one year ago.

During November, existing-home sales outperformed its potential by 9.4% or an estimated 586,000 SAAR units.

"Our Potential Home Sales model indicates household formation, higher house-buying power and looser credit conditions continued to drive housing market potential relative to one year ago," Fleming said. "However, limited inventory continued to dampen housing market potential, a dynamic we expect to persist in 2022."