Goldman on The Impact on GDP of Higher Mortgage Rates

A few brief excerpts from a research note by economists Kris Dawsey and Hui Shan at Goldman Sachs: The Drag from Higher Mortgage Rates

The rise in mortgage rates may impact the economy through two broad channels: (1) the direct impact on construction activity and home sales, which feed into the residential investment component of GDP, and (2) the indirect effects of lower home prices and less refinancing activity on consumption.

Complementing our past research on the impact of mortgage rates on various aspects of housing, we use a vector autoregression (VAR)-based approach to trace out the potential impact of the rise in mortgage rates. This analysis points to a manageable total impact on real GDP growth over the coming year of roughly two tenths of a percentage point. The direct effects of higher mortgage rates are likely to be larger in magnitude than the indirect effects.

Our estimate is subject to uncertainty. On the one hand, factors other than housing affordability―such as origination capacity constraints and borrower credit quality issues―are at present probably more important constraints than they have been historically. As a result, the sensitivity of housing indicators to changes in mortgage rates may be lower than historical estimates suggest. On the other hand, for technical reasons the nature of our statistical analysis may understate the magnitude of the potential impact.

My view - as I noted in House Prices and Mortgage Rates earlier this week - is that higher mortgage rates might slow price increases, but not lead to a decline in prices. I'll look into the relationship between mortgage rates and activity, but my first guess is the recent increase in rates will not slow the recovery in residential investment.