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Is your market one of a new six where homes have finally fully recovered value lost in the Great Recession?

How high will mortgage rates need to rise to curtail home buying?

Think Tank
Anthony B. Sanders,
 Ph.D.
Distinguished Professor of Real Estate Finance at George Mason University

While mortgage rates are currently stuck in a pattern of volatility, rising one week and falling the next, the Federal Reserve has said they will raise interest rates later this year. To learn more about the effect rising mortgage rates will have on the real estate market, we spoke with Dr. Anthony B. Sanders, distinguished professor of real estate finance at George Mason University, who explained what economic factors will have to take place before consumers see a serious increase in interest rates.

Q: How high will mortgage rates need to rise to curtail home buying?

A: Mortgage purchase applications are stuck at 1995 levels because the following labor market indicators are still below 2007 levels:

  1. Labor force participation rate
  2. Real median household income
  3. Average wage growth
Of three indicators above, average wage growth is the superior indicator of labor force “health.” And 30-year mortgage rates are near all-time lows and they still can't ignite households to apply for a mortgage to purchase a home.

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    In the chart above, “Escape Velocity” refers to GDP growth found in previous recoveries. That should lead to wage growth.

    If mortgage rates do go up (and most of the recent data is too weak to signal a rise in rates -- although, Yellen and the Fed may raise rates slightly before the end of the year) it would make a bad situation even worse, UNLESS the U.S. gets some serious wage and household income growth going. But outside a few areas like the San Francisco Bay Area, most households are still struggling after the Great Recession.

    Below is a chart on the collapse of commodity prices…NOT a good sign for economic growth!!!

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