Ten years ago, the Federal Reserve responded to the economic downturn by pushing interest rates to record low levels. Those very low interest rates helped the housing market get back on its feet by making it cheaper to own a home.
But with the economy running on all cylinders now, the Fed has begun a series of rate hikes, with additional increases taking place throughout the year. Rising interest rates affect millions of Americans, from credit card holders to investors to homebuyers.
For homebuyers, as interest rates go back up to more normal levels, the cost of buying a house will also rise. But that’s not necessarily a game ender. To see how prices might be hit by rising rates, real estate consultant John Burns ran the numbers, assuming the rate for a 30-year fixed mortgage gradually moves up to around 6 percent – from the current average of around 4%. For homebuyers who lock in lower rates now, the cost of homeownership is still pretty affordable – depending on where you live.
So if current rising rates are still manageable, what’s the motivation to buy now? Purchasing power. Even one percentage point can seriously affect your purchasing power (i.e. how much house you can afford). According to Lawrence Yun, the Chief Economist and Senior Vice President of Research at the National Association of Realtors, a simple mortgage calculation shows a loss of about 12% in purchasing power from a one-percentage point rise in mortgage rates. For example, a person taking out a $200,000 30-year fixed rate mortgage at 3.75% rate would have a $926 monthly payment (just principal and interest). At 4.75%, and with the desire to keep the same monthly payment, the loan amount has to be cut to $177,500. The buyer’s purchasing power has been reduced due to the higher rate.
The bottom line? According to the experts at Freddie Mac, the days of historically low interest rates are ending for the time being. But reasonable, incremental rate hikes are not bad for America’s housing market. Rising interest rates reflect strong economic growth, which could make the housing market even more competitive. However, if you have your eye on a particular home or neighborhood, you should probably get a move on before successive rate hikes put it out of your price range.
Established in 1970, AV Homes is a nationally respected builder with a long heritage of innovative designs and unsurpassed craftsmanship. Specializing in both single family homes and 55-plus communities, AV Homes has built and closed over 7,500 homes nationwide. Today, AV Homes is engaged in homebuilding, land development, and other real estate operations in Arizona, Florida, and North Carolina.