Rates Playing Catch Up With Overall Economic Growth

While the current economic expansion may be the longest in the nation's history, rising rates and home values have many experts wondering about a slowdown, and if it will drag down the overall economy.

According to Zillow senior economist Aaron Terrazas, the next recession is "unlikely" to be set off by housing. Instead, monetary policy and rising interest rates are more likely to trigger a recession. In the meantime, home value growth, while gaining 6.5 percent annually in August, is being overshadowed by mortgage rate growth as the typical mortgage payment grew 15.4 percent annually, before the latest rate hike. This particularly affects renters seeking to buy, as renter households will spend between 28.4 and 36.8 percent of their income per month, whereas homeowner households will spend about 17.5 percent, below the historical norm.

Rates have hovered at or just slightly above historic lows for much of the past decade; the last time American consumers had to grapple with a sustained rise in interest rates was during the first half of 2006. Since the Federal Reserve began acting in 2015 to raise short-term interest rates again, long-term interest rates – including mortgage rates – have remained surprising low. They had withstood the Fed rate hikes through 2018 without moving much until this fall. Since the last Fed move on September 27, the average rate for a 30-year fixed-rate mortgage has climbed about 15 basis points to around 4.7 percent.

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