Rising mortgage rates feared most to trigger home value erosion

In the latest ValueInsured Modern Homebuyer Survey conducted in Summer 2018, 65% of all American homeowners believe the housing market is near its current cycle peak and 63% believe there will be a price correction in their area within two years – the highest levels recorded for both measures since the inception of the quarterly national survey in Spring 2016.

Given that similar correction concerns have been reported recently by The Washington Post, CNBC, Bloomberg, and Forbes, among many others, this declining homeowner confidence in home value sustainability is not news. What has not been examined more closely, however, are the potential catalysts for the pending correction.

Among all homeowners surveyed:

  • 54% believe rising mortgage rates would eventually stunt the housing market and trigger lower home value in their neighborhood
  • 33% believe new tax laws that could decrease potential tax credits for homeowners and make homeownership more expensive would trigger lower prices
  • 16% believe a home price correction in their neighborhood will follow the next stock market correction
  • 11% believe intensifying trade wars will be the catalyst that erode their local home value

Considering that increased home buying in the past three years has been at least partially propelled by historically low mortgage rates, it is reasonable for over half of all American homeowners to believe that rising mortgage rates could temper buyer enthusiasm and eventually lower prices. While the average 30-year fixed mortgage rate is at 4.78% this week, 58% of all Americans believe it will rise above 5% by 2019.

Among millennials who are highly interested in buying their first home “in the near future,” 44% believe new tax laws for homeowners would drive down home value. The higher propensity of millennial homebuyers’ concern for new tax laws could be explained by the higher concentration of millennials in coastal housing markets, which are predicted to be most affected by the new tax laws, and where the effects of new taxes have received more negative local media attention. In the east coast, in particular New York City, there are signs that new tax laws have already made owning a home less attractive, and have decreased buying demand and home prices.

In California, 44% of all homeowners believe new tax laws will trigger a decline in home prices in their area. In Connecticut and New Jersey, the percentages for the same measure are a staggering 49% and 58% respectively. In Washington state, 63% of all homeowners believe rising mortgage rates will trigger lower buying demand and a home value correction. This is not far-fetched as many homebuyers are already stretched so thin in what has become one of the most unaffordable housing markets in the country.