Rising Mortgage Rates Expected - Consumer Impact

It is going to happen...interest rates will rise as the economy and real estate markets improve.  Based on what the Federal Reserve tells us, that scenario may be set in motion soon.

The Fed isn't expected to raise base interest rates when they meet this week, but it's expected that they will send signals of what is to come.  They said that they would consider raising rates when unemployment goes below 6.5% and inflation is hovering around 2.0%, but the Fed will look at many more issues before deciding to raise rates.

Interest rates have been staying around 4.3%-4.5% for 30 year home purchase financing over the past several months, which is about 1% higher than a year ago.  Rates are expected to climb to between 5 and 5.5% by the end of 2014.

Of course, rising interest rates will have an effect on purchasing power.  A home buyer will be able to finance a higher sales price now versus what they can qualify for as rates increase.  At 4.5% for 30 years, the principle and interest payment is $1,013.37 on a $200,000 mortgage loan.

See below for principle and interest calculations at rising interest rates:

$200,000 at 4.50% = $1,013.37
$200,000 at 4.75% = $1,043.29
$200,000 at 5.00% = $1,073.64
$200,000 at 5.25% = $1,104.41
$200,000 at 5.50% = $1,135.48

            CLICK HERE to perform mortgage calculations for your price range

As you can see, going from 4.5% to 5.5% causes an 11% increase in monthly payment.  Assuming a $200,000 mortgage is a buyer's maximum approval at 4.5%, a 5.5% interest rate will reduce a buyer's spending power to $178,475.  Couple that with rising home prices (6.1% increase overall last year) in many locations, one can see the significance.  This will affect home buyers, as well as home sellers.

Rate increases are expected to be gradual throughout the year, but they are expected to rise.  Rates are still at or near historical lows we had not experienced priot to the past several years.  Before that, 6-7% rates were considered great.  The point here is to provide some persective on how rates will affect home purchases in the future.

Mortgage Rates Expected to Increase, Fed To Reduce Bond Purchases

Ben Bernake announced yesterday that the Federal Reserve will begin reducing the amount of bonds it will purchase, from $85 billion per month to $75 billion.  This is the first step taken to "take off the training wheels" on the federal stimulus it created to get the United States out of it's recession.  The Fed’s purchases will be divided between $40 billion in Treasuries and $35 billion in mortgage bonds starting in January, Bernanke said.

“Reflecting cumulative progress and an improved outlook for the job market, the committee decided today to modestly reduce the monthly pace at which it is adding to the longer-term securities on its balance sheet,” Bernanke said at a press conference in Washington today after a meeting of the Federal Open Market Committee.

Stocks rallied on the good news reported regarding the improved economy and reduced unemployment figures.  The Fed said its benchmark interest rate is likely to stay low “well past the time that the unemployment rate declines below 6.5 percent, especially if projected inflation continues to run below” the Fed’s 2 percent goal.

Since the Fed began signaling in May that it may soon begin to dial down the purchases, interest rates have drifted higher, with the average 30-year fixed mortgage rate rising to 4.42% from 3.35% in May. The rising rates helped convince the Fed to delay tapering in September.  Rates are expected to continue to increase, but not at an immediate, drastic amount.  However, it will have an affect on the purchasing power for home buyers.

Further complicating the picture is that Fed Chairman Ben Bernanke plans to step down when his term ends in January. Vice Chair Janet Yellen, who has been nominated to succeed him, has expressed an even more pro-growth approach but must deal with a policymaking committee with diverse views of the stimulus.

*Information source from Bloomberg News and USA Today

Mortgage Interest Rates Are On The Rise

Interest rates have reached a 6 month high for 30 year loans, with an average rate of 3.63%, up from last week's average of 3.52%.  For comparison, in November-December 2012 the rates were at a 3.35% national average. The average 15 year rate also saw a small increase from 2.76% to 2.79%.

The main contributors to the increase are the improved economy and the drop in unemployment rates.  In fact, unemployment rates dropped below expectations to 7.7%.  The short version of why these indicators affect interest rates, is due to consumer confidence and the obvious fact that if more people are working, there will be more people with the ability to make a home purchase.

So, what this means for a home buyer is that interest rates are on the rise.  They fluctuate daily and we will see peaks and valleys, but the rates will be trending upward as the economy improves.  That is why this year would be a great time to consider making a home purchase.  Economists are projecting that rates will reach 4% by year's end.  It's still a fantastic rate, but as the rates increase, it will affect a buyer's purchasing limit.

For sellers, we are seeing in most communities, that there is high buyer demand due to the rising rates and not enough homes for sale yet to meet the demand.  When there is high demand and lower supply, that indicates a trend leaning toward a seller's market.  That is why we are also seeing a slight increase in home sales prices, shorter days on the market and multiple offer situations on homes. 

This is a very exciting point-in-time where a homeowner can experience a better seller's market, and still take advantage of the low interest rates and great sales prices, before we see further increases in those rates and prices.  I would enjoy speaking to anyone considering a move, to discuss the local market and how it affects your specific situation and needs.