Friday, March 30, 2018

How will Rising Rates Tug on our Market?

Since the beginning of the year mortgage rates have been on a rather steady upswing. It's not like they have launched into space, but rather just a slow and steady rise. The 4th quarter of last year more than 3% GDP growth and that was the best quarter since the economic crash in 2009. This is putting upward pressure on rates. A strong economy is nearly always met with higher interest rates.

For the real estate market, higher mortgage rates are a real braking device. A buyer looking at a $300,000 mortgage can expect to pay a principle and interest payment of $1347 at 3.5%. This of course doesn't include taxes and insurance but those are not readily affected by rates. At 4.5% that same $300,000 loan has a PI payment of $1520. At 5.5% it rises to $1703. A $356 increase in payment generally will require an additional $700 to $1000 in monthly income to qualify. Even if housing prices stay flat and do not change, buyers will lose buying power as rates continue upward.

Most analysts are expected the price appreciation to soften in 2018 to around 3% - 5%. Even at the low end of that scale a $315,000 house will be $324,450 in a year. If a buyer can get 4.25% today that house with 15K down will have a PI payment of $1476 plus a few hundred more in taxes and insurance. Next year at the low end of analysts projections the same house will have a PI payment of  $1657. That is more than $200 a month more expensive. That means at least $500 a month in additional income to qualify.

I still find buyers that are resistant to this concept and often they find themselves priced out of the market or settling for way less house than they would have been able to afford had they acted earlier. The worst part is that over time the interest rate does much more financial damage than paying a higher price. The rate of principle reduction is slower, the total amount of interest paid is much higher. In fact, a $300,000 mortgage at 4.5% will have a total of 360 payments of $1520 for $547,200. At 5.25% it's 360 payments of $1657 for $596,520. So just three quarters of one percent leads to $50,000 more in payments over time.

Rates are on the rise, so it's time to buy or die. So to speak.

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