The days of record low mortgage rates have come to an end, as fixed-mortgage rates hover around 4%. And while there are many saying that rising rates won’t hurt the housing market, others are more concerned.
Freddie Mac researchers say at today’s home price and income levels, mortgage rates would have to rise closer to 7% before families with median incomes would find themselves unable to afford a median-priced home. But is that true for first-time homebuyers?
Sterne Agee Analyst Jay McCanless is afraid if mortgage rates rise above current levels, affordability could begin to take a toll on home builders.
McCanless focused his concern on homebuilder KB Home (KBH), a company whose cancellation rate could increase as affordability decreases.
The analyst estimates 60% to 70% of KBH’s closings in a given quarter are from first-time homebuyers. If rates continue to rise, McCanless believes his order growth and EPS estimates for FY13 may be overly optimistic.
McCanless also notes that higher mortgage rates could prove to be a mental headwind for investors.
"We are skeptical about KBH's forecast for full-year profitability because of management's order guidance in F2Q13, and because of the negative impact higher mortgage rates could have on KBH's core entry-level customer," said McCanless in a recent report.
Fannie Mae Chief Economist Doug Duncan said the concern should be less about what the rates have risen to and more about the speed at which they are rising.
Duncan noted that in 1994, for instance, rates rose 2% over a 12-month period, resulting in a huge impact on home prices, which fell significantly.
"If the rise happens rapidly, it tends to have an impact," said Duncan, who added that once rates rise 100 basis points, home sales may begin to slow.
As far as first-time homebuyers go, Duncan said it all depends on how high the mortgage costs go. "It’s all about the size of the mortgage that they’re going to try to take on relative to their financial strength," said Duncan.
Overall, first-time homebuyers are making up about 30% of total buyers, said Duncan.
High investor activity is making up the difference, he added. "If investors fell off, would first-time buyers be bigger?" asked Duncan.
A lot lies on that very important "if," according to Duncan. If investors start to back out, you’ll likely see prices flatten out.
"We do believe there is going to be a slow down," said Duncan.
But Duncan added, "We’re not up to the average long run mortgage rate that the economy has seen over all those years." From World War II to today, the average 30-year fixed-rate mortgage is about 6.5%, according to Duncan, who noted, "People have forgotten that there were mortgage rates at the 14% and 15% range for awhile."
"Even though rates have risen pretty quickly and significantly, they were from a very low level — the lowest level since World War II — so we’re not even close to the average 30-year fixed-rate mortgage rate," he added. "The greater concern is not that level, but the speed at which it rises."