Interest rates have been trending higher since the fall of 2017, and I fully expect they will continue in that direction – albeit relatively slowly – as we move through the balance of the year and into 2019. So what does this mean for the US housing market?
It might come as a surprise to learn that I really don’t think rising interest rates will have a major impact on the housing market. Here is my reasoning:
1. First Time Home Buyers
As interest rates rise, I expect more buyers to get off the fence and into the market; specifically, first time buyers who, according to Freddie Mac, made up nearly half of new mortgages in the first quarter of this year. First-time buyers are critical to the overall health of the housing market because of the subsequent chain reaction of sales that result so this is actually a positive outcome of rising rates.
2. Easing Credit Standards
Rising interest rates may actually push some lenders to modestly ease credit standards. I know this statement will cause some people to think that easing credit will immediately send us back to the days of sub-prime lending and housing bubbles, but I don’t see this happening. Even a very modest easing of credit will allow for more than one million new home buyers to qualify for a mortgage.
3. Low Unemployment
We stand today in a country with very low unemployment (currently 4.0% and likely to get close to 3.5% by year’s end). Low unemployment rates encourage employers to raise wages to keep existing talent, as well as to recruit new talent. Wage growth can, to a degree, offset increasing interest rates because, as wages rise, buyers can afford higher mortgage payments.
There is a clear relationship between housing supply, home prices, and interest rates. We’re already seeing a shift in inventory levels with more homes coming on the market, and I fully expect this trend to continue for the foreseeable future. This increase in supply is, in part, a result of homeowners looking to cash in on their home’s appreciation before interest rates rise too far. This, on its own, will help ease the growth of home prices and offset rising interest rates. Furthermore, if we start to see more new construction activity at the lower end of the market, this too will help.
National versus Local
Up until this point, I’ve looked at how rising interest rates might impact the housing market on a national level, but as we all know, real estate is local, and different markets react to shifts in different ways. For example, rising interest rates will be felt more in expensive housing markets, such as San Francisco, New York, Los Angeles, and Orange County, but I expect to see less impact in areas like Cleveland, Philadelphia, Pittsburg, and Detroit, where buyers spend a lower percentage of their incomes on housing. The exception to this would be if interest rates continue to rise for a prolonged period; in that case, we might see demand start to taper off, especially in the less expensive housing markets where buyers are more price sensitive.
For more than seven years, home buyers and real estate professionals alike have grown very accustomed to historically low interest rates. We always knew the time would come when they would begin to rise again, but that doesn’t mean the outlook for housing is doom and gloom. On the contrary, I believe rising interest rates will help bring us closer to a more balanced real estate market, something that is sorely needed in many markets across the country.
It’s true, certain parts of our market are cooling off. We are seeing fewer multiple offers, fewer bidding wars, and fewer inspection concessions.
However, homes that are priced right and in great condition are selling, and in many cases, selling quickly.
As buyers feel the market cool a bit, it may cause them to want to wait. They sometimes feel like it’s a better choice to ‘wait and see what happens.’
The reality is, there is a real cost to waiting given two specific facts.
1. Interest rates will continue to rise
2. Prices will continue to rise
Interest rates are a little more than 0.5% higher than a year ago and experts predict them to be another 0.5% higher by this time next year.
Prices have been appreciating at roughly 10% per year for the last four years. Based on the numbers, we see that appreciation could be 5% per year for the next two years.
So, let’s look at a house priced at $450,000 today. If prices go up “only” 5% for the next 12 months, that home will cost $22,500 more in a year.
And, if rates go up another half percent, the monthly payment will be $206 higher. That’s an 11% increase!
In an environment of rising prices and rising rates, there is a real cost to “wait and see.”
Let Windermere Real Estate’s Chief Economist Matthew Gardner walk you through what to expect from the real estate market amidst rising interest rates.
Today we will take a fun trip down memory lane.
Did you know that it was the fall of 1981 when mortgage interest rates hit their all time peak? Yes, it was this time 36 years ago when 30-year mortgage rates hit 18.39%.
It’s important to note that in those days, not many home buyers were opting for a 30-fixed loan because rates were so high. There were a lot of people looking at adjustable rate products as a way to reduce the monthly payment.
Just for fun, let’s look at what a monthly payment would look like if those same rates from 1981 existed today.
If rates were 18.39% today, a $350,000 home with a 20% down payment would have a monthly principal and interest payment of…
Thank goodness rates aren’t that high today. They are actually about 15% lower!
Today’s 30-year rate sits at 3.83% (which by the way is roughly half of the long term average).
A monthly principal and interest payment on a $350,000 home with 20% down is…
$1,309. Three thousand dollars lower than it would be using 1981 ‘s rates.
The Federal Reserve raised their benchmark interest rate 0.25% this week.
Some perspective is in order…
While the Fed was raising their rates this week, mortgage rates actually dipped lower (although slightly).
Mortgage rates today on a 30-year loan are essentially 4.25%.
The long term average for mortage rates, going all the way back to 1970 is 7.5%
For every 1% rise in rates, there is a corresponding 10% impact to the monthly payment.
Mortgage rates have increased about 0.75% since the election.
Most economists expect rates to increase another 0.5% by year-end.
Click HERE to read a great article that goes a little more into depth about what this means for homeowners.
We are watching mortgage rates closely and will continue to keep our customers updated as to where the experts think they are heading. Contact us directly if you have any questions. (970) 460-3033.
Pretend that customer walks into our office and tells us they are looking for a single family home in Fort Collins. We would tell them that there are 314 to choose from. But if they told us their price range is up to $300,000, their choices would be limited to just 10 homes.
Single family homes priced under $300,000 only represent 3.18% of the total inventory in Fort Collins. This is a big reason why buyers are opening up their search to communities that surround Fort Collins.
Here’s a snapshot of the major Northern Colorado markets:
- Loveland: 176 Homes For Sale/15 Priced Under $300,000
- Windsor: 151 Homes For Sale/6 Priced Under $300,000
- Greeley: 98 Homes For Sale/33 Priced Under $300,000
- Fort Collins: 314 Homes For Sale/10 Priced Under $300,000
Last week Windermere’s Chief Economist Matthew Gardner joined us for our annual Market Forecast events in Colorado. We were pleased to host over 500 customers at two events in Denver and Fort Collins.
Here are some of the big takeaways that we shared:
- Interest rates will increase to 4.6% by the end of the year
- First-time buyers are back and will make up 47% of all buyers in 2017
- Inventory will remain at record lows and will continue to drive up prices
- Appreciation is expected to be between 9% and 7% across our Front Range markets
- Home builders will get creative in order to hit lower price points – we will see more “tiny homes” and more homes without basements