By Caitlin McCabe / The Philadelphia Inquirer

For the last few weeks, the economy has been pretty confusing.

The U.S. stock market took a major nosedive last month, finishing as the worst December since 1931, during the Great Depression. On Christmas Eve, the stock markets suffered their steepest decline. Then, just two days later, stocks had a miraculous comeback, with the Dow Jones Industrial Average soaring more than 1,000 points in a single day for the first time.

Meanwhile, things have been equally unclear regarding jobs and wages. The unemployment rate is at a 49-year low of 3.7 percent, yet more than 60 percent of Americans recently said they did not receive a pay raise at their current job or get a better-paying job in the last 12 months. That all comes as job creation has slowed, and optimism among manufacturers has slipped.

So you’re probably wondering what’s happening with the housing market’s mortgage rates—the one thing that consistently affects how much you pay for a home. In October, the 30-year fixed mortgage rate jumped past 5 percent for the first time since 2011, creating considerable speculation among market observers that mortgage rates would only go up from there. Then, in December, the rates ticked back down again, hovering at 4.5 percent around Christmas.

It’s difficult to predict where mortgage rates—or the economy—will go, with forecasts and realities changing month-to-month, or day-to-day.

Still, most economists expect that mortgage rates will continue to rise throughout the year. The housing website and research company Zillow projects that by the end of 2019, rates will reach 5.8 percent. The National Association of Realtors’ vice president of research has said 5.3 percent. Freddie Mac, meanwhile, has a more conservative estimate, predicting that the 30-year fixed rate will average 5.1 percent in 2019.

But what does that mean for the typical homebuyer, who likely doesn’t monitor mortgage rates consistently? According to one of the latest Zillow reports, rising rates can actually mean a lot.

In a December analysis that studied housing affordability in markets across the nation, Zillow found that mortgage rates can affect buyers’ budgets more than they might think. The higher that mortgage rates rise, Zillow found, the less a buyer can spend on a house and still keep payments affordable.

Consider, for example, a buyer who makes the current U.S. median household income of $61,240 and wants to spend 30 percent of that salary each month on a mortgage payment. In January 2018, when mortgage rates were 4.15 percent, the buyer could have bought a $393,700 home, according to Zillow’s research. Now, with rates hovering around 4.63 percent, a buyer who wanted the same monthly payment could instead afford a $372,000 home ($21,700 less).

If mortgage rates were to rise as high as 6 percent, Zillow found, a buyer would instead have to shop for a $319,200 house to maintain the same affordability, a nearly 19 percent reduction in purchase price from the 4.15 percent mortgage rate at this time last year.

“The interest rates are a really, really big deal,” said Skylar Olsen, director of economic research and outreach at Zillow. “A small change could impact your monthly mortgage payment quite a bit.”

Rising mortgage rates also could have ripple effects across the entire market.

First-time or current buyers, intimidated by the possibility of taking on more expensive debt, could decide to delay or quit their housing search altogether, Olsen said. Homeowners would, as a result, stay in their current properties, reducing the number of available homes on the market. Generally, a housing market is considered healthy when homeowners are trading up, thereby freeing up housing for different subsets of buyers. When current starter-home owners, for example, do not move on to larger homes, it’s harder for first-time buyers to get into the market.

With fewer homeowners selling and buying, Olsen said, the supply constraints that the housing market is already facing could get worse. This, in turn, could increase competition and force prices to rise once again—forcing shoppers to make additional concessions on the size or location of a home.

“All of this is part of the housing ecosystem,” Olsen said. “Nothing moves or changes in a vacuum.”

Zillow analyzed 35 metropolitan areas as part of its study, finding that the effect of interest rate changes varies considerably by location. For example, in the country’s most expensive metro area, San Jose, California, home shoppers would have to look for homes that are nearly $102,000 less expensive if interest rates reached 6 percent, compared with where they are now.

Still, multiple economists noted, mortgage rates remain low—and would continue to be considered low even if they reached 6 percent—compared with the past. After reaching a peak of more than 18 percent in October 1981, the 30-year fixed mortgage rate hovered between 7 and 10 percent for all of the 1990s and early 2000s.

An “important thing to keep in mind is that rates are coming off of unprece- dented historic lows,” said Kevin Gillen, a senior research fellow at the Lindy Institute for Urban Innovation at Drexel University.

“Once they cross 6 percent, however, you can start to become more concerned.”

Gillen also noted that rising mortgage rates would likely affect the rental market.

“Current renters may have to put off becoming homeowners until they have a larger down payment saved up in order to qualify for a mortgage,” Gillen said. “So they remain renters longer than they would otherwise.”

“Single-family housing and rental housing are often considered as competing—rather than complementary —products,” he continued. “What is good for one can be bad for the other.”

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