After analyzing previous instances when mortgage rates increased significantly, Mark Palim, VP of Fannie Mae’s Economic and Strategic Research Group, determined history suggests rate increases won’t stop the current recovery. Instead, a rapid rise in rates is “more likely to contribute to a decrease in home purchase volume and an increase in the market share of adjustable-rate mortgages (ARMs).” Over the past 10 years, there have been two other instances when mortgage rates saw significant increases, according to Palim.
From October 1993 to December 1994, rates increased to 9.20 percent, and in October 1998 to May 2000, rates rose to 8.51 percent. When rates rose from 1993 to 1994, existing home sales fell after increasing, though the impact on home prices was more subdued. Home price appreciation did in fact slow, but annual gains were still in positive territory. The second time around from 1998 to 2000, the housing market reacted in a more “muted” way over the longer period of time. Home sales and home price appreciation “moved sideways” rather than reversing course, according to Palim. Meanwhile, the appetite for ARMs increased during both periods.
However, Palim does not expect this happen the market share for ARMs to increase substantially this time around.
“Given the limitations on ARMs under the recently promulgated Qualified Mortgage rule and the fact that rates on fixed-rate mortgages remain relatively low in historical terms, we may see a more muted increase in the ARM share of the market than in prior periods of rising rates,” he said.