Throughout 2016, U.S. housing prices continued to rise by about 5% year-over-year, adding to the cumulative gains made since the lows of 2011. Nationally, home prices now stand above the pre-crisis peak, as measured by the S&P CoreLogic Case-Shiller U.S. National Home Price Index. However, the recent trend toward higher interest rates has raised concerns about the outlook for home prices going into 2017, eliciting a range of responses from sheer panic to resilient optimism.

Home Prices are Now above their Pre-Crisis Peak. Source: S&P CoreLogic Case-Schiller, Bloomberg (12/16/16)

The post-election interest-rate move has been swift and significant, on a scale and span that mirrors the ‘Taper Tantrum’ of 2013. In that episode, the mere telegraphing by Fed officials that the end of monetary easing was near, amid an uncertain outlook for growth, roiled financial markets across the globe. Equities suffered alongside credit as markets traded lower. As bond spreads moved out, lending conditions tightened in the mortgage market. As a result, existing home sales fell and new home sales stalled.

Homes stand in this aerial photograph taken with a tilt-shift lens above New Jersey, U.S., on Wednesday, June 10, 2015. Photographer: Craig Warga/Bloomberg

In this more recent rate rise episode, however, equities have moved higher and credit spreads have narrowed—at least so far. In fact, the total return of the Bank of America Merrill Lynch U.S. High Yield Index was still positive on the quarter through mid-December, despite the fact that rates are now well above  the summer’s lows by more than 100 basis points. The key difference this time versus the Taper Tantrum, is today’s very positive growth expectations, driven by the prospects of lower tax rates, lower regulations and increased infrastructure spending.

Higher Rates Lower Affordability

While higher rates have so far had a fairly benign impact on financial markets, they have led to an increase in mortgage rates. Higher mortgage rates can decrease housing affordability, and thus have the potential to lower the demand for home purchases. According to Bankrate.com, the average national rate for a 30-year fixed mortgage was just over 4.15% in mid-December, around 85 basis points higher than the 3.3% lows of September. This means that a home buyer purchasing a new home with 20% down at October’s median home price of $304,500 would now have to pay $1,187 per month at a 4.17% rate, versus  $1,070 at a 3.32% rate—an increase of $117 per month.