Recently, there have been some serious ups and downs when it comes to mortgage affordability. Some consumers stepping away from the market with rising mortgage interest rates. Others being undeterred from entering it despite huge increases in home values. Mortgage rates today are in the mid 4% to 5% range, and that’s quite low compared with pre-recession norms, which sometimes reached as high as 6 percent, according to Zillow. However, continued increases in mortgage rates could pose problems in the market soon. Much higher rates would start to price many consumers out of home purchases in most large markets.
If rates hit 5.5 percent before the end of the year and home prices keep rising as they have (both of which are expected to happen). It could cause 17 of the nation’s 35 largest housing markets to carry lower affordability than historical averages. When rates hit 6 percent, that will be true for 20 of those major US cities, the report said.
An Unexpected Effect?
Rising mortgage interest rates may lead to difficulty in the housing market in other ways. By disincentivizing current homeowners from selling their properties after locking in rates while they were at or near all-time lows, the report said. It’s unclear just how much this “mortgage lock-in” issue will affect the inventory of existing homes being put on the market. But the issue could become a significant impediment to broader home sales.
However, the typical mortgage payment in the U.S. in 2017 made up just 15.7% of the median household income. In order to reach the historical average of 21%, rates would likely need to exceed 7 percent, the report said. It’s difficult to predict just what impact declining affordability will have on the market any time soon.
A Widespread Issue
Some estimates showed that the vast majority of homeowners nationwide either purchased a property or refinanced an existing mortgage when rates were at or near their lowest levels ever. With the spring buying season right around the corner, that could present a major impediment to housing activity. At this point, every minor increase in mortgage interest rates will likely price even more current owners out of feeling as though selling. Therefore, needing to obtain a mortgage may not be worth it financially, even as prices continue to grow at rates well above historical averages.
This could have a significant depressive effect on home buying activity going forward. As demand among would-be purchasers continue to flood the market and drive up prices for the relatively limited supply of homes for sale. This situation could lead to more competition and price increases in the months ahead and further pricing additional shoppers out of the market.
A Closer Look at Rising Mortgage Interest Rates
Most readings show mortgage rates hovering around 4.5% – 4.6%, inching up slowly most weeks, according to The Mortgage Reports. This comes as many aspects of the economy are improving. For example, falling unemployment and rising stock prices. On the other hand, yields on Treasury bonds seem to be in something of a holding pattern. Treasuries are seen as a strong indicator of near-future mortgage rate movements. It means that if Treasury bonds are holding steady or declining, home loan affordability is likely to follow suit.
This presents an interesting issue for new home buyers to navigate. While they may face higher up-front costs when locking in a mortgage rate now, doing so will likely pay off in the long run. Potentially saving tens of thousands of dollars over the life of a mortgage, the report said.
With these issues in mind, it’s vital for consumers to put in the work to get into the market as soon as they can. You want to get in before rates and prices reach a tipping point of unaffordability. Working to improve the size of a down payment and build a better credit score in the next few months could seriously pay off for years to come!