Interest rates are rising, but we are still in a low-interest rate environment. Here’s a breakdown on what this all means for homebuyers.
As you may already know, last Wednesday the Federal Reserve raised short-term interest rates for the third time this year, by a quarter-percentage point. This action has been the eighth rate hike over the past two years, and analysts expect one more increase for 2018. This recent hike brings the federal funds rate to a new range of 2 % to 2.25 %. For those of us in the real estate industry, long-term fixed mortgage rates are generally tied to the yields on U.S. Treasury notes. That’s why we’ve already seen an increase in rates since the Fed started raising their rates.
Over the summer we saw stabilization in fixed-rate mortgages after a peak average of 4.66 % in May. However, we are once again seeing a gradual upward trend, with an average of 4.6 % for this year and 5.1 % predicted for 2019. Wednesday’s announcement by the Federal Reserve to raise short-term interest rates reinforces this upward trend.
The rate for a 30-year fixed-rate mortgage averaged 4.65 % on September 20 – the highest since May. Just two weeks ago, the average was at 4.60 %. Last year, it averaged only 3.83 %, after a record low in December 2012 of 3.5%. According to Freddie Mac’s chief economist Sam Khater, the borrowing costs are rising due to the “strong economy, higher U.S. Government debt issuances, and global trade tensions.”
There is no reason to be alarmed by slight increases in the rates because we are still in a low-interest rate environment overall. Looking at the past, I can remember the days of 17-18% adjustable rate mortgages in the early 1980’s, with a 5 cap over the life of the loan. During those years you could not get a fixed rate mortgage. So it is essential to keep a long-term perspective here. The reason I am presenting this information is to help you make smart decisions under these current market conditions.
How could rising rates affect homebuyers?
The interest rate a buyer pays on their home mortgage has a direct impact on their monthly payment: The higher the rate, the higher their payment will be and the more money they will pay over the length of the loan.
Here’s an example provided by FreddieMac.com: A rate increase from 3.99 percent to 4.66 percent would require a buyer with a $250,000 30-year fixed-rate mortgage to pay over $1,000 more each year in principal and interest.
What about home prices? How will they be affected by rising interest rates?
Home price growth is expected to slow in 2019, which might help buffer the effect of rising interest rates on homebuyers’ wallets. According to CoreLogic’s latest Home Price Index, national home prices have appreciated 6.2% from this time last year and are predicted to be 5.1% higher next year – a slight slowdown in the rates of increase. (Freddie Mac offered a similar prediction with house price growth at 6% for 2018 and 4.9% for 2019).
Realtor.com Chief Economist Danielle Hale recently commented on the subject, stating that “Higher mortgage rates will undoubtedly contribute to a further slowdown in home price growth as higher costs force buyers to choose smaller, less expensive homes or postpone their search.”
In the Lakes Region, sales have been hampered all year by a lean supply of affordable listings. Water-access and lower priced waterfront listings are also in short supply due to increased activity in the second home market. As a result of the above factors in the marketplace, national “pending” home sales fell in August to the slowest pace since the start of the year, according to the National Association of Realtors®. (Current homeowners should take note: if you are looking to sell, the market conditions are still very favorable right now.)
What this all means for the consumer:
Even with a moderate home price increase, interest rate increases could result in buyers paying more for their property. If you are planning to buy a home in the next year, taking action sooner than later could save you considerable money.
Another thing to consider with rising interest rates is the type of financing obtained on a loan. With interest rates rising, adjustable-rate mortgages will undoubtedly be heading higher, too. If you are currently holding an adjustable rate mortgage, it may be smart to consider refinancing to a fixed rate while they are still in the upper 4% range.
Homeownership has many advantages that outweigh the costs of rising interest rates. Homeownership is essentially a savings plan that builds wealth over time, as homeowners steadily build equity each month. They also benefit from mortgage interest, and property tax (up to $10,000) tax deductions, which can amount to thousands of dollars per year. Most importantly, “there’s no place like home.”
A Realtor® can answer questions you might have about the current market and how interest rates can affect you. A Realtor® will help you find a property that meets your requirements and is within your budget. They can also recommend several lenders for you to interview for current rates and loan options. If you’re seriously considering buying, but are waiting for “the precise time,” it may be wise to lock in at a lower rate now!
Frank Roche is the President of Roche Realty Group with two offices in Meredith (603) 279-7046, and Laconia (603) 528-0088.