June 6th, 2013
Mortgage rates have hit their highest rate in a year. Foreclosures seem to have bottomed out, so the available houses has decreased. If you’re concerned that your chance in a generation to buy a house has ended, take a deep breath and think again.
In most metropolitan areas, there are still some houses that are in the what could be affordable range. The key is working with a reputable mortgage loan officer to get pre-approval and determine what is affordable for you.
The Washington Post reports that the rise in interest rates is tied to an improved economy. Home prices will increase at approximately the same rate.
It also shows an initial reason for some optimism. At a 30-year fixed-rate mortgage rate of about 3.8 percent, the typical American homebuyer can afford a $279,000 house. That’s 45 percent more than the current price of houses. That suggests that affordability isn’t the thing holding Americans back from buying houses (instead, it may be such factors as tight credit standards, difficulty building up a down payment or lack of confidence in future job prospects). It also implies that slight increases in the mortgage rate shouldn’t completely undermine the improvement in the housing market; the thing to watch is not rates per se, but what happens on those other factors that are drags on would-be homeowners.
Yahoo! Finance agrees stating that we are in a once-in-a-generation opportunity for home buyers. They also report that current home prices are approximately 27% below market value.
The housing affordability index, which includes interest rates as well as income and prices in its calculation, remains just shy of its all-time record high. But what about interest rates—are they not artificially low and therefore the primary reason why affordability is so high?
We think the short answer to this question is “No”.
While rates are being depressed by QE, home prices are still about 27% below their previous peak according to C-S. Over this same period, personal income is up sharply. In fact, if mortgage rates went up 100 basis points from their current level, all else being equal, affordability would still remain higher than it has been in every year prior to 2010. Secondly, all else is probably not equal because a 100 basis point rise in mortgage rates would likely be associated with a meaningful economic improvement, including a step-up in income growth (i.e., faster job gains).
Forbes is reporting that the increased interest rates could stall the economy. However, they also wonder if the increase in rates would loosen some of the tight restrictions that mortgage lenders are requiring.
The first thing rising rates affect is refinance applications. Refi apps have fallen for the past several weeks, logging a 15% drop (after accounting for Memorial Day) last week from the week before, according to the Mortgage Bankers Association. Mortgage applications have begun to tick down too, falling 11.5% from the week earlier. Yet if rates continue to rise, it might spur qualified home buyers sitting on the fence to make purchases before financing becomes any more expensive, facilitating a short term uptick in home sales.
Rising rates could create a long term benefit for the market as well: slightly looser lending standards. Real estate experts have lamented how exceedingly tight credit has been — even for buyers who on paper qualify for mortgages. Lenders have been overly cautious about underwriting new mortgages in large part because the returns associated with low rates haven’t necessarily matched the level of risk.
“Now that prices are rising, there is far less default risk for people taking out mortgages so if the credit standard is dialed back down toward normal from stringent, I think we could easily negate the impact of rising rates,” says Yun.
So don’t give up your dream of owning a home. Work with a qualified mortgage loan officer to get pre-approved and understand how much you could qualify for. Then when a good house in the right neighborhood comes on the market, you’ll have a much stronger position for your bid.