Home Affordability

Rising Interest Rates Impact Housing Affordability and Mortgages

Rising Interest Rates Impact Housing Affordability and Mortgages

While economists ponder where the stock market will trend tomorrow, a new home buyer is more concerned with a different trend – their interest rate. The same is true for an existing home owner who is looking to refinance. A day in the life of a typical real estate agent is often asked about mortgage rates. Almost always are they asked about mortgage rates and what happens with rising interest rates impact housing affordability and their mortgage.

To date in 2017, so far we’ve seen one interest rate hike when the Federal Reserve’s Federal Open Market Committee (FOMC) meet earlier this year. They voted to raise interest rates for the first time in 2017. Yet while this was an historic measure, it’s also not likely the last either. This year alone, it is expected the Federal Reserve will hike rates one or two more time and continue into 2018.

Why are Interest Rates an important Housing Affordability factor?
As home buyers enter the real estate market, they often review interest rates and attach sensitivity to the rate along with the purchase price and housing affordability. It is their largest purchase and therefore they need to watch their bottom line. As mortgage rates rise, there is an opposite effect on housing affordability.

Interest Rates Impact Housing Affordability

Rising Interest Rates have an immediate Impact on Housing Affordability.

Interest Rates Impact Housing Affordability

When interest rates rise, a home becomes more expensive. Here’s a classic example using the typical $250,000 home purchase.

HOME PRICE $250,000

Down Payment: 20% or $50,000
Mortgage: $200,000
Interest Rate: 4% rate


Interest Rate: 4% rate
Payment: $954.83 per month
*This payment does not include taxes and other expenses.


Interest Rate: 5% rate
Payment: $1,013.37 per month
*This payment does not include taxes and other expenses

DIFFERENCE: 1% or $58.54 a month!

Over one year, this is over $700 more expensive.
Over 30 years, it’s a $21,000 difference.

Why Pay More if you don’t have to?

It’s easy to say if someone can’t pay an extra $50 a month, then they shouldn’t buy a home in the first place. There is some truth to that statement, but we are Americans and the American way is to buy happiness. And to take that $50/month and divide it by $5 Starbucks cups of coffee – so it’s really just ten a month a person needs to sacrifice to buy their new home. However, so many people buying a home are already çash strapped and this is a large amount to consider small or marginal.

Also, people often comment that they don’t think rates will rise that drastically over the near term and they may be correct. However, just last year, rates averages 3.75% while today they hover around 4.25% – a 50 point basis or a half of one percent. That is still far off rates in the 5 or 6 percent range most have been comfortable with just over a decade ago.

Moving forward into the second half of the year, there are many factors that Fed Chair Janet Yellen and the FOMC will have to incorporate into their analysis including fiscal stimulus or expansionary issues from the current administration. Will it be enough to stave off inflation? Will home prices continue to rise? How will the stock market fair? What will treasure notes perform? Will jobs increase? Learn today how interest rates impact housing affordability.

When we break down the moving factors in mortgage rates, we see they follow many other trends. Typically, interest rates track the direction of the 10-year Treasury note and the 30-year Treasury bond. What also drives the Federal Reserve Bank is the stability of the housing market. Currently, the outlook remains strong due to the combination of limited inventory coupled with strong prices. We see strong prices remain with high demand for what does come on the market. The U.S. Department of Commerce recently reported that February’s housing starts (new homes being built) have hit a 10-year high.

According to Bloomberg:
Permits for single-family homes, where building costs and sale prices are the highest, rose 3.1 percent in February to an 832,000 rate that, in good news for a thinly supplied new home market, is up 13.5 percent year-on-year. This is offset, however, by a downturn in multi-family units where permits fell 22 percent in the month to a 381,000 rate that is down a yearly 11.2 percent.

A driver in interest rates is inflation and according to Charles Schwab, inflation has increased in recent quarters and was moving close to the Fed’s 2% objective and will likely stabilize according to recent FOMC statements around 2 percent.

Recently Bankrate.com noted mortgage rates rising again over the past few weeks. The 30-year fixed-rate mortgage recently rose to 4.44% or another quarter point for the year. This was the highest rate for the 30-year mortgage since it hit the same level back in April 2014.

Many economists and financial planners recommend many home owners and home buyers buy down their rates. Since the star of 2017, rates have inched up nearly 50 basis points (half a percent) and they could continue to go higher. As long as the Fed remains optimistic that the economy is strong and continues to move ahead, rates will continue to see new levels over the coming months and years ahead baring a tragedy or major economic event.

Future Interest Rate Indicators

Another major moving target and consideration for interest rates impact housing affordability and the markets that drive them will be two manor economic policies that do not seem to have consensus or agreement in Congress:

    1. Healthcare Reform – true reform that will cover as many people at the best price possible. If reform brings extra disposable income home, it will help lift the economy and rates will surely follow along with home prices.
    2. Tax Reform – lowering corporate taxes in theory will spur on new purchases by Fortune 1000 companies. It should also help small business to expedite hiring that will result in more people in the labor force and thereby increasing take home pay.

As we look forward, no matter if you’re officially in the market today or not, you’re always in the market. You need to understand how rising interest rates impact housing affordability and mortgages. Some are ready to buy tomorrow or sell their home to downsize – and even those who may not need a mortgage, a solid understanding how rates impact housing affordability will make you an educated investor and participant isn’t he real estate market.

If you’re able to buy a home today or can be in the current market, now is a great time to contact a local REALTOR. Preferably one right here with Home Marketsite and a local mortgage professional or lender. READY TO SELL? If you’re looking to sell your home, contact us today to get a complimentary home market analysis. You’ll also learn how Home Marketsite agent’s can help you Take More Home!

0 replies

Leave a Reply

Want to join the discussion?
Feel free to contribute!

Leave a Reply

Your email address will not be published. Required fields are marked *