Are Interest Rates on the Rise?

Real estate continues to roll along at a nice and breezy clip.  Some areas are seeing quick rising prices while others are still a little flat.  Every indication I see is that the bottom is behind us and depending on your location, prices are well on their way to recovery .  

As this return to stabilty begins to take hold, the federal government will very likely reduce its aggressive mortgage backing.  This is something I have been preaching for several years and many economic and political factors are pointing to 2013-2014 marking either the end or a severe curtailing of that mortgage manipulation by the government.

After hitting a bedrock bottom low on rates in late April and early May, rates have rocketed upwards all month long where they now sit precariously perched on the four percent threshold.  To answer the title question; YES, rates are on the rise.  I don't think buyers need to panic about four percent, after all, the forty year average sits at around 6.5%.  

But as the rate climbs, buyers lose purchasing power in the form higher monthly payments and reduced bank approval values.  With prices on the rise this works doubly against buyers entering the market. Higher prices and lower bank approval means much less house is available.  Suddenly that four bedroom beauty with 2200 square feet and stone patio that was 220k with a monthly payment of $1600 is no longer in reach and a $180k 1950s three bedroom rambler with 1200 square feet has the same monthly payment.  

Here in the Portland OR / Vancouver, WA market we are seeing multiple offers on entry and mid level housing.  Builders are starting to come back into the picture, but inventory remains tight.  That puts upward pressure on prices.  In general we have seen values move between 8-12% over the last twelve months.

If you are a buyer, it is time to pull the trigger and maximize your purchasing power as it is already past its peak.  For sellers you may want to contact your favorite Realtor® and have a market analysis done on your home.  What was unsellable last year is quite possibly very doable today.  Perhaps you have gained back that equity you need to sell.

The bottom line is this; real estate is back.  Rents are up and prices although climbing are still low.  Buyers should make their move now or resign themselves to a long period of renting.  Sellers can enjoy a short marketing time and an opportunity to move up to a house that may have been out of reach in 2006-07 but is affordable now because of market conditions.  

The proverb of the day is; Don't let the grass grow under your feet.

Here are some excerpts from a CBS Money Watch article I recently read, click here to see the full article.

By ILYCE GLINK / MONEYWATCH/ May 30, 2013, 11:32 AM

"Fixed mortgage interest rates are at their highest point in more than a year, and aren't showing any signs of changing course.""The thrust behind climbing rates is actually the positive economic news coming out of the housing market this month, and most analysts seem to feel pretty solid in saying that the recovery is here to stay."

"A number of home price indices, from Case-Schiller to Freddie Mac to the National Association of Realtors all show home prices are continuing to increase. Homes sales are also up, despite reports of low inventory."

"While the Federal Reserve has helped keep interest rates low to encourage home buying, the time is coming soon when that kind of artificial manipulation of the market won't be necessary. People are already rushing to buy homes while prices and interest rates remain low. It's only a matter of time before they creep back to the normal six or seven percent."

Home Prices on the Rise

The NAR has released reporting data for all fifty states and D.C. and 42 of 51 are reporting gains in real estate values.  Out here in the West we are enjoying the strongest appreciation as inventory remains quite tight.  

This remains a golden opportunity to buy real estate.  Although we are not at the bottom of the market anymore, we are still enjoying low overall prices.  The movement upwards helps build confidence in the market and increases the chances of short and long term appreciation for current home buyers.  Rates remain low but have been edging up steadily over the last several weeks.  it is critical to remember that interest rates historically hover around 6-7 percent and any rate under 6% is considered a good rate.  The current average here in Washington State is running in the upper 3's.  

I am very excited about the trends in the market right now.   
   
This in from the National Association of Realtors

• Price gains were largest in the West. Nevada, Arizona, California, and Idaho each saw gains exceeding 15 percent from one year ago. The map above shows the breakout of annual gains for each state.
• Nationally, prices rose 1.9 percent from the fourth quarter. Note that this is seasonally adjusted, but not annualized, meaning that if prices continue to gain at this pace, it would imply an 8 percent gain for home prices nationally in the course of a year.
• FHFA uses a weighted repeat sales index that compares the prices of properties that involve a conforming conventional mortgage purchased or securitized by Fannie Mae or Freddie Mac. Thus, the FHFA index is based on a broad geographical sample of home transactions, though it misses out on transactions involving cash, jumbo or FHA/VA loans. In spite of this limitation, its price trend is usually similar to that of other price measures.

Homeowners Staying Put Longer, Maybe

The National Association of Realtors released information recently that shows the average tenure of a homeowner has increased to roughly nine years.  The chart shows a long, steady period of average tenure between six and seven years before the rise to nine.

I believe this data needs to be taken in the context of our recent prolonged flat and declining price period we just came out of.  Many home owners were unable to make that move they wanted to make because of one or more economic factors.  They may have lost their job, their home value could have been "underwater", they might have been nervous about the economy, etc.

I do not believe it is coincidental that the rise to nine years abruptly started in 2009. This of course was the year following the great banking crisis and real estate market crash of October, 2008.  I would neither be at all surprised if the trend begins to return to that normal six to seven years as the real estate market has stabilized and consumer confidence is beginning to return. This is a trailing indicator and even as the market returns to modest growth this chart may continue to rise before it starts to show a decline.

The current market conditions at the entry level are tight inventory, modest demand and ridiculously low interest rates.  If this real estate market segment remains hot for another year or two the middle will begin to surge as well.  The move up market takes time to develop and is to a great extent reliant on the performance at the entry level.  Entry level sellers often become mid level buyers and to do so, they need equity in their current home.  Our modest gains in real estate values are helping them get that equity back.

Providing that our economy does not take a nosedive, we should begin to see a sigificant increase in the demand for mid level and high end housing over the next few years.  To keep the real estate market healthy and robust we need the economy to cooperate.  Interest rates ideally would remain at or below 6.5% (we are way below that right now), job growth should be improving at least slightly and rental rates need to remain aggressive.

I am quite bullish on real estate right now.  I do not see the market tearing a hole in the fabric of time and space like it did from 2002-2007, but I do see some modest, healthy growth for the next several years.