– We were asked to write an article for REALTOR.com last week and thought we would share…
While homebuyers have been spoiled with historic low mortgage rates during the 2013-2017 period, these rates have been trending up over the last year. During the 2013-2017 period, the average 30-year fixed rate (0 points) was 3.75%. Currently, that average 30-year rate has jumped to 4.5%.
Let’s take a look at how that impacts the monthly payment for a would-be homebuyer. Assuming a $500,000 sales price with 20% down and a $400,000 mortgage:
$400,000 30-year fixed @ 3.75% $1852/month PI (principal/interest)
$400,000 30-year fixed @ 4.5% $2,027/month PI
This represents a $175 monthly payment increase, or 9.5%, pretty substantial.
Let’s examine how that would impact total interest paid over the life of the loan (with the caveat that most homeowners will not keep a mortgage for 30 years):
As you can see, that is a 23.5% increase in interest paid over the life of the loan, which is pretty remarkable for only a 0.75% rise in rates.
Taking it one step further, let’s see how this affects the affordability of a homebuyer. That same homebuyer that previously could afford a $500,000 home (@ 3.75%), would now only be able to afford a $465,000 home, or 7% less affordability.
So how is this rate rise playing out in the marketplace?
Mortgage rates had a rather sudden jump in February 2018 to their current level, where they have leveled off somewhat throughout the year (that is until the last week, where we have seen another min-rise with the 10-year T-bond moving above 3% threshold). Surprisingly, the initial reaction earlier this year was that it did not seem to bother a lot of would-be homebuyers, which we believe is largely due to the red-hot real estate market marching on (since 2011-2012 in most areas of the country) and buyers “not wanting to miss out.” However, just recently we have seen that sentiment shift with more homebuyers balking at continued higher prices, combined with less affordability caused by these rising rates.
We believe this trend will continue as homebuyers are starting to question how financially-wise it is to chase higher and higher home prices. Thus, we have finally started to see a leveling-off of home prices, which is a very healthy sign. While many are predicting rates will continue to rise, we are perhaps contrarian in thinking rates will also level off at their current levels for the next couple of years and perhaps even decline when the inevitable recession will again hit our economy. While we will not guess at when and what will cause the next recession, it will happen. The good news when it does happen is that we will not see a housing crisis like we did in 2007. The quality of mortgages originated over the last decade are vastly superior to the pre-crisis years because of one simple fact. That is, true stated income loans (“liar loans”) went away after the housing crisis and will not be coming back anytime soon, so hurray for that!