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Eager Buyers in a Volatile Market

Declining mortgage rates should be a welcome relief for new home buyers, according to First American [1] Chief Economist Mark Fleming. In addition, Fleming notes how stock market volatility may play a part in assisting home buyers.

“While mortgage rates are expected to continue to rise in 2019, last month’s stock market volatility has reversed the recent upward trend of mortgage rates. It’s often overlooked that the popular 30-year, fixed-rate mortgage is closely tied to the 10-year Treasury bond,” said Fleming. “When the economy is doing well, investors prioritize investing in securities over bonds, driving higher longer-term Treasury yields, which also tends to increase mortgage rates.”

According to Fleming, the opposite happened in December. After a steep sell-off, investors began to seek “safe havens” and mortgage rates began to decline.

Fleming added, “the decline in mortgage rates is a welcome relief to prospective home buyers who have mostly experienced a year of rising rates and house prices. The December drop in mortgage rates increased the market potential for existing-home sales by 0.3 percent."

Fleming also notes that after the drop in the 30-year fixed mortgage rate in 2012, both new and home buyers are feeling dissuaded from buying or moving, when the rate reversed again in 2016 and started to climb.

“This period of rising rates has dissuaded existing homeowners from selling their home – why move when it will cost more each month to borrow the same amount from the bank? Additionally, rising rates have reduced affordability in some high-cost markets, discouraging some potential first-time home buyers from entering the market,” said Fleming. “So, rising mortgage rates discourage both existing homeowners and some first-time home buyers from entering the market.”

“When considering the right time to buy or sell a home, an important factor in the decision should be the market’s overall health, which is largely a function of supply and demand. Knowing how close the market is to a healthy level of activity can help consumers determine if it is a good time to buy or sell, and what might happen to the market in the future. That’s difficult to assess when looking at the number of homes sold at a particular point in time without understanding the health of the market at that time,” said Fleming. “Historical context is critically important. Our Potential Home Sales Model measures what home sales should be based on the economic, demographic and housing market environments.”

Read the full report here. [2]