I would imagine that housing will stay flat. New mortgages and new rentals will both increase in cost as lending costs rise. IIRC, generally, a higher interest rate environment will incentivize people to go from renting to home ownership as rents increase due to increase lending costs & lowered/flatter housing costs.

Each 1% hike in interest reduces the leveraged buying power of all buyers about ~$21k per $1000 mortgage payment.

$1000 @ 4% = 209k loan (30 yr) $1000 @ 5% = 188k loan (30 yr) $1000 @ 6% = 167k loan (30 yr)

The maximum monthly payments for a mortgage are capped at 36-44% Debt-to-Income (DTI) ratio. At the 36% DTI, a hypothetical Joe with no debt making 10k/mo, will be approved for about $2000/mo mortgage. Today's market at 4% means Joe can get a $418k loan. By 2018, with interest rates moved up 2%, he would only be able to get a $334k loan with that same $2k.

Banks make money on the rate arbitrage. Currently, they get money at .25% and loan it out at around 4%. I'm guessing they will be borrowing from the fed at 2% and loaning it out for around 5.75-6% if we stick to the 2% rate by 2018. But I think long-term mortgages are tied to treasury bonds.

If it causes enough people to affect the lending volume, the mortgage lenders may be willing to take a small hit to their margins and try to make up for it in volume.

I guess we will see. People generally aren't willing to sell their homes for a loss, so I'd imagine that realestate will stay relatively flat for a little bit.