Rising Mortgage Rates: Three Things To Keep an Eye On

Thanks to historically low mortgage interest rates, many have been able to live the American dream and purchase a home. Mid-September figures for the 30-year fix-rate mortgage had a national average of 4.28 percent but we all know good things come to an end.

Just as 2015 comes around the corner, many real estate professionals and economists believe this will also bring rising mortgage rates.

According to Stan Humphries, the chief economist for Zillow, the 30-year rate could reach the five percent mark by the middle of next year as the Federal Reserve discontinues their mortgage-backed security purchases.

Should rates go north, prospective homeowners may see their home-buying opportunities change. But it doesn’t have to be all doom and gloom. Here are three things for consumers to keep their eyes on should mortgage rates rise.

A cut in buying power

For most of this year, rates have sat between four to five percent, but are poised to rise around .75 percent in 2015. Borrowers will see this cut into their buying power—perhaps more than they realize.

This increase could produce higher monthly mortgage payments next year by $700-plus in the more expensive U.S. places.

In a comparison by Zillow that reviewed 35 metropolitan areas for a one percent increase in 30-year mortgages (from 4.1 percent to 5.1 percent), with rising increases for home values during the next year, monthly payments could increase for the St. Louis area to $65 per month and $200 per month for the New York metropolitan area. Over in Silicon Valley/San Jose area, there’s a possible $710 jump.

Decreased inventory

Along with spending more per month, consumers will have fewer homes to choose from when they’re ready to buy—especially hard hit will be those first-time homeowners seeking either mid- or lower-priced dwellings.

Real estate broker Redfin has July data supporting this with July property figures. They saw homes under the $375,000 range hard hit from 2011 figures as there were 28 percent less of homes in this price range and for a sticker price $130,000 or less, 50 percent fewer.

But for those seeking homes greater than a $375,000, this inventory rose 16 percent as compared to 2011.

However, when reviewing August numbers, the down trend continued. “Affordable inventory” fell by 9 percent as compared to July’s numbers.

Less competition

Sure, the two aforementioned points are concerning, but here’s one silver lining for consumers: a less competitive housing market. The National Association of Realtors recently reported in August, investors and all-cash purchase dramatically fell.

For prospective homeowners, this is a good thing according to Nela Richardson, Redfin’s chief economist. She said, “Many markets are not going to see the same multiple-bid environment that we saw even earlier this year. It will be easier to win the home of your dreams than it was a few months ago.”

Furthermore, for those first-time buyers, she believes they can take a deep breath as over the next few months as rates will remain low and they can take their time looking around.

While mortgage rates will likely change in the next year, prospective homeowners still have time to take advantage of these historic lows now. But similar to any major investment, it will be important to look at the current market, comparison shop and make an informed decision.

source: totalmortgage.com

Have Massive Home Price Gains Eclipsed the Benefit of Low Mortgage Rates?

The new threat to those resisting the urge to buy real estate (how dare you) is the risk of rising mortgage rates.

All the pundits believe interest rates are headed closer to 5% for a 30-year fixed, up nearly a full percentage point from current levels.

The sales pitch is pretty straightforward – if you wait any longer you’re really going to be priced out of the market, what with home prices and mortgage rates on the rise.

If you think things are expensive today, worry about tomorrow, they say.


But you have to question whether it’s a good deal to buy at this point, given the tremendous price increases over the past couple years.


Are Low Interest Rates Really a Strong Enough Tradeoff?


Sure, low mortgage rates are great. They make monthly mortgage payments more affordable, even if home prices are (a lot) higher than they once were.

And despite wages being stagnant, people can afford to buy more expensive homes because interest rates are so cheap. That’s the point, right?

But if you look at things from a home price-to-income ratio perspective, property values look pretty inflated historically.

So are the low rates still incentive enough to buy a home? And should you buy now because rates and prices are only going to climb higher?

That’s the million-dollar question, and one nobody can really answer with absolute certainty.

You could argue that we’re due for another correction after two solid (insane) years of gains. It’s clear home price growth is already slowing down, and it could even turn negative in the near future.


Just Take a Look at Property Histories

 

You don’t have to be a real estate genius to see what I’m talking about. Just go to Redfin or Zillow and scroll down to the property history for just about any for sale listing that sold recently.

You’ll see something like the screenshot above, a home that was purchased relatively recently and listed not too long after for a huge premium. Sure, they probably flipped it (and that kitchen looks absolutely breathtaking), but come on.

In this example, the home is being sold for 56% more just five months later! And this isn’t an outlier, it’s the norm in today’s bloated real estate market.

Just to do a little math, you could have purchased this home for $362,000 earlier this year and put down 20%, leaving you with a mortgage of $289,600.

Factor in a mortgage rate around 4.125% for a 30-year fixed and the monthly mortgage payment is just over $1,400.

But the asking price is now $564,900 (notice the price cut), which requires a down payment of $112,980 to get to 80% LTV (that’s about $40,000 more you need to bring to the closing table).

At a loan amount of $451,920, you’d be looking at a monthly mortgage payment of $2,190 at today’s ultra low rates (4.125% on a 30-year fixed).

To put it in perspective, mortgage rates would need to rise to about 8.25% at the original sales price for the monthly mortgage payment to be a similar amount (roughly $2,175).

In other words, home prices seemed to have shot way too high despite the low rates doing their part to keep things reasonable.

Sure, low mortgage rates make this home a lot more affordable to a lot more people, even at today’s inflated price, but it requires a much larger down payment.

And what happens when interest rates do rise to more historic norms? Who will buy this house from you at a premium in the future if everyone is priced out?

I suppose the takeaway here is to be really cautious when searching for a home to buy today, instead of just trying to get in to avoid missing the boat. A year or two ago, any house would do, now you need to be a lot more particular.

source: thetruthaboutmortgage.com