Aneta Markowska, Chief US Economist at Societe Generale, explains how today's real mortgage rates are actually now negative and what that means for housing.
Rising interest rates are supposed to hurt the housing market. But, if people expect home values to rise faster than mortgage rates, buying a home will still look like a good deal. According to one top economist, that's exactly what's happening right now in America's real estate market.
Aneta Markowska, Chief US Economist at Societe Generale, is optimistic about housing demand despite the recent run-up in mortgage rates.
The key to Markowska's view is the concept of "real" interest rates, versus "nominal" interest rates. What's the difference between the two? Inflation. The "real" interest rate is approximately the stated ("nominal") interest rate minus the inflation rate.
(CNBC real estate coverage: Realty Check)
Markowska's most recent research shows that Americans now expect home prices to rise at an annualized rate of 5%. That's significant because the expected appreciation is now higher than the current 30-year fixed mortgage rate of 4.44%. Thus, according to Markowska's estimates, the real rate is actually a little bit negative (In this case, 4.44% - 5.0% = -0.56%). If that's the case, then homebuyers will feel like they're profiting when they get a mortgage today because their borrowing costs are now less than expected appreciation.
That wasn't the case four years ago, according to Markowska's research. Even though mortgages were in the 5% range in 2009, declining home prices made the real mortgage rate higher than 20%. People with mortgages were essentially paying money to own a depreciating asset half a decade ago.
It was only this year that Markowska's model finally showed Americans expecting positive appreciation on their home values. Even when mortgage rates were lower in 2012 than they are today, negative expectations about housing made the rates feel higher to borrowers.
"A year ago, we had a nominal mortgage rate of about 3.5% but expectations were mildly negative," says Markowska to Talking Numbers. "So, you were really looking at real mortgage rates 3.5%, 4%, maybe even slightly higher. Today, that has completely reversed."
That change is bringing in buyers to the market who stayed away while real interest rates were high.
"As long as housing was seen as a depreciating asset, everybody was perfectly happy renting," says Markowska. "I think that psychology is changing."
"If you're a potential buyer who has been renting, on the sidelines waiting for a better entry point, you've just realized that you've missed that entry point, both in terms of prices and rates," says Markowska." If you're in your 20s or 30s thinking about starting a family, you're not going to be renting forever. And, I think if you expect prices to rise, you're going to be enticed to actually come in and pull the trigger."
To see more of Aneta Markowska's interview with Talking Numbers, watch the video above.
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- Mortgage Loans
- interest rates