Higher Rates Soon, More Buyers Later

New households, higher wages will mitigate impact of rising rates on home sales pace.

May 28, 2015

The growing tide of good economic news means the days of rock-bottom mortgage rates are over. That’s the word from the Michael C. Fratantoni, chief economist of the Mortgage Bankers Association.

Interest rates will head up as the Federal Reserve eases accommodations it made to boost the weak economy, said Fratantoni, speaking at the National Association of REALTORS® office in Washington in May. On the positive side, wages are likely to increase, too, and with new household formation on the rise, the environment for housing is healthy. Fratantoni was speaking as part of the REALTOR® University Speaker Series.

A chief reason for optimism: the improving job market. On average, there are fewer than two job-seekers per open position, down from a post-economic crisis high of nearly seven, he said. Meanwhile, the unemployment rate continues to drop, putting pressure on employers to raise wages in order to compete for workers. Rising wages, in turn, will trigger inflation and more rate hikes.

Fratantoni expects the first Fed hike to come in September. The 30-year fixed mortgage, which has hovered below 4 percent, is likely to hit 4.4 percent by the end of 2015 and surpass 5 percent next year, he said. But home sales aren’t likely to be adversely affected. “We think the improvements in the job market that we’ve already experienced, and that we’re likely to experience the remainder of this year and into next year, are going to be enough to offset any headwind from that rise in rates,” he said.

Another positive factor, Fratantoni said, is the number of younger buyers moving out on their own. “Household formation, which had been lagging for a while, is now running in excess of population growth,” he said. “You had a lot of young adults who just did not venture out on their own for one reason or another that have now made the jump.”

Even if most of these new households are starting as renters, the shift will eventually be good for housing sales because living independently is a prerequisite to the much bigger step of taking on the responsibilities of ownership, Fratantoni said. “You’re getting some of these households out on their own, experiencing all that it means when you’re buying your own toilet paper and tuna fish. A couple of years down the road, they’ll have that experience and will be ready to move on to home ownership.”

Their transition into ownership won’t be without challenges.

First, finding the right home may not be easy. Most real estate professionals have experienced the impact of low inventory on their buyer clients. It creates competition for listings, driving prices up. National Association of REALTORS® Chief Economist Lawrence Yun, who hosts the REALTOR® University speaker series, has said the problem will continue until home building picks up. Speaking at a residential trends forum at NAR’s Legislative Meetings & Expo in May, Yun observed that there were 880,000 new-home sales in 2000 and only 440,000 in 2014—despite a U.S. population increase of 37 million over that time period.

In his talk, Fratantoni identified two additional challenges for first-time buyers: tight credit and interest-rate volatility. The first, he said, is beginning to abate as policymakers focus on improving credit availability for people buying at the low end of the price scale. After a period of weakness in the market for smaller mortgages, he noted, “you’re seeing almost every loan-size bucket improving on a year-to-year basis.”

The volatility will come as banks try to predict when the Fed will act to raise interest rates and consumers try to figure out how much they can afford to pay. For buyers coming into the market in the next year, “I think there’s room for a substantial increase in rate volatility,” he said. “You’re going to feel it when you’re talking to your buyers.”

But none of those factors will keep buyers away, he said. After a moribund 2014, the MBA forecasts a 14 percent year-over-year increase in purchase-money mortgage originations in 2015 and nearly 9 percent in 2016.

Outlook for Originations

  2014 2015 2016

Refinance ($, in billions)  

484 512 379

Single-family purchase money ($, in billions)

638 729 791

Source: Mortgage Bankers Association forecast as of May 1, 2015

Outlook for Existing Home Sales

  2014 2015 2016

In millions

4.9 5.3 5.5

Source: National Association of REALTORS® forecast as of May 1, 2015


As a writer-producer for the National Association of REALTORS® based in Washington, Sam Silverstein develops articles and videos for NAR's members and others interested in its activities, statistics and research. You can contact him at SSilverstein@realtors.org.