I’m not sure it’s worth the worry.
I tossed into my trusty spreadsheet a 25-year history of mortgage rate movements from the St. Louis Fed, local job growth from the Employment Development Department, and Orange County home price and sales volume data from CoreLogic.
What I found in the interaction between economic forces and homebuying habits is that pricier mortgages often coincide with eras of higher home prices. Since 1990, when mortgage rates have increased over a one-year period, Orange County’s median selling prices have risen by an average 8.7 percent in the same timeframe. And the following year, home prices advanced, on average, by 3.9 percent.
Certainly, that’s not the conventional wisdom. But even in the worst case scenarios – the 25 months with the largest one-year rate hikes – housing fared well: Prices averaged 11.1 percent gains that year and 2.3 percent in the 12 months that followed.
Yes, rising rates scare off some shoppers and chill home buying activity – but not in a big way.
Since 1990, when rates are up in a one-year period, Orange County home sales volume falls 2.2 percent on average in those 12 months, then declines 5 percent the following year. Sluggish, but by no means a crash.
And in the worst-case rate hikes, sales slowed modestly on average: down 5.4 percent during the year in question and another 3.9 percent over the next 12 months. Not a reason for panic.
So how can the nightmarish scenario for real estate pros – rising interest rates – actually be relatively benign, and perhaps even good news, statistically speaking?
Remember the three key words of real estate: Jobs! Jobs! Jobs! Interest rates commonly rise when the economy is hot – like today’s business climate, in which jobs are growing at a 3 percent annual pace.
Since 1990, mortgage rates have increased in one-year periods when local jobs are growing at a 2.1 percent average annual rate – twice the historical norm. Rising rates do increase house payments, however, so a house hunter needs plenty of confidence in the job market to make a leap into home buying mode.
Look what job growth means for housing. Since 1990, in any year when Orange County bosses are in hiring mode – that is, they generate year-over-year job growth – home prices have averaged 8.3 percent gains and similar size increases the following year. Sales activity is basically flat in the same two years – pretty remarkable stability amid a significant jump in pricing.
Then look at boom times. In the 25 months with the largest year-over-year job gains since 1990, Orange County’s average price gain is roughly equal to what was seen in all of those hiring years. But that faster-paced job growth means an average jump of 15.2 percent in homebuying activity the first year and 6.8 percent in the 12 months that follow.
Yes, these results are a bit counter-intuitive. And to be fair, history isn’t a perfect guide to the future. For example, home prices rose only 70 percent of the time in a year when mortgage rates moved higher – so industry fears of potential trouble aren’t totally unjustified.
Still, what should really be spooking the local housing market late in 2015? Any risk of a significant slowdown in Orange County’s biggest-since-the-’90s hiring spree.