HOW DOES THE RISE IN MORTGAGE INTEREST RATES IMPACT BUYING POWER?

By Tracy Coles (The Hernandez Group, Keller Williams Roswell)

Home prices and sales have risen steadily over the past 3 years, and we are seeing a continued annual increase of up to 5% in home prices, as a result of pent up buyer demand and low supply.  As we usher in 2017 we may see a leveling of growth due to lack of inventory and increased interest rates.

Historically, a GDP growth of 3% or higher is considered fantastic, and the latest reports show a growth of 4%.  The result = jobs, jobs, jobs.  In the Atlanta area we are seeing an influx of companies, like Mercedes Benz and 67% of small businesses expect an increase in revenue this year while economists are forecasting a 3% increase in wages.  An increase in interest rates was heavily forecast in 2015, yet we continued to see incredibly low interest rates through 2016.  It is important to understand that the end of quantitative easing and loose monetary policies have greatly contributed to the low interest environment.  As Borrowing costs are very low and lenders are relaxing guidelines and standards we are seeing an increase in first time homebuyers, who have been reluctant to enter the market, beginning to take advantage of the latest products and the economic upswing.

We have closed the chapter on the Foreclosure crisis, with distressed sales reaching a more “normal” level, making up less than 10% of the market.  Since the mortgage debacle lenders have required documented income, minimum credit scores, and lower debt to income rations, resulting solid loans.

With all of this great news, you can expect some speed bumps, especially for those that procrastinate.  Economists from Realtor.com and the National Association of Realtors agree, based upon reports from the Federal Reserve, we can expect to see a continued increase in home prices as well as an increase in interest rates of 4.4-5%.  They say we are looking at “when” not “if” rates will rise.  What does this mean for you?

Let’s take a look at some numbers to put this in perspective:

The median home price in the US is $214,000. (The Roswell average is closer to $350,000.) With 20% down and an interest rate of 4%, you can expect a monthly payment of $817.33. Now, based upon the lowest extreme of 4.4%, that same loan payment increases to $857.30. Calculated at the most widely expected rate of 5%, that payment jumps to $919 and at the max of 5.1%, the monthly payment, hits $929.53.  The result is an increase of 5 to 14% in monthly payments.  Now let’s calculate in the 5% increase in home prices and you are looking at a monthly payment increase of 17-18%!!

For buyers – that means that you will be able to purchase less house for your money. With home values on the rise, and interest rates still very low, now is the time to move forward with your home purchase and maximize the amount of home you can afford. For sellers, that means that your buyer pool (or the number of buyers that are able to afford your home) is shrinking and now is the time to put your home on the market and take advantage of the pent up demand and low inventory.

 

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