What Rising Rates Mean To a Homebuyer

Why did interest rates go up and what does that mean for homebuyers? Here’s what’s going on currently in the market:

Recently, the rates jumped from the mid 3% range to 4.5%, so the monthly payment for a $200,000 loan for 30 years would be $1,013 vs. $843. Over the course of a year, that’s $2,040 more in payments a year. Rising interest rates hurt first time homebuyers the most because they are usually on the edge of the loan qualification. Looking at this rising interest rate trend, it’s going to be easier to get a loan in 2013 in than 2014. Inflation is not a threat, but this can soon change.

You’d think with the economy recovering the housing market should be also on the upswing, but it’s not quite there yet because of the new QM (Qualified Mortgage) and QRM (Qualified Residential Mortgage) rules. Although these government regulations are good at setting loan standards for buyers, they limit the debt ratios and shrink the pool of buyers.

Home prices are going to rise, which is good for the homebuyer and homeseller who is upgrading or relocating, but not so much for the homebuyer who is coming from a rental situation. But no matter the rate increase, people will still buy homes if they were looking to buy in 2013. Then again, a 4.5% interest rate is still at a historical low if you look at where we were in 1983 at 15.28%.

The interest rate picture can change quickly—the rates jumped because the market listened to the Federal Reserve (the Fed), and interest rates are tied to GDP, inflation, and employment. As of August 2, 2013, the U.S. Department of Labor Statistics reported the unemployment rate at 7.4%, with the greatest increase of jobs in retail trade, food services and drinking establishments, financial activities, and wholesale trade. Don’t you know it’s a great time to be a bartender!

Right now the Fed is in tapering mode, which means it’s not buying as many bonds as before. The Fed knows the housing market is a huge piece of the economy, so it’s easing its language to calm the markets. But they don’t want to call it tightening, because they don’t want to slow (i.e. scare) down the economy. As a result of this tapering, the interest rate went up. It’s all about perception, more based on sentiment than fact, and many analysts are split on what the future holds.

People will still want to buy homes. Sure rates are going up, you can still re-finance, but will homeowners be as happy with the current quotes as opposed to what they were in May? Probably not.

The Bottom Line

Higher interest rates will increase home prices, which will put more homes on the market. With more homes and therefore more inventory and more choice, buyers who can afford a higher interest payment will have more choices. And the increase in rates will help the cash buyers, who aren’t affected by rate fluctuations. With inventory being low in Raleigh and Wake County, this is welcome news!

If you’re a perspective homebuyer

When you’re looking at houses, don’t push your financial limits, especially as the rates are going up. Make a budget, factoring home upkeep and Home Owner Association dues. Many of the debt ratios that mortgage lenders use shouldn’t be used—for instance the ratio is the same in Florida as it is in North Carolina where we have more taxes. Make sure you account for taxes, since mortgage rates are based on gross monthly income. What you qualify for and what you can afford are two different things!

Let’s keep this conversation going on Facebook and Twitter. If you have questions, be sure to call my direct line at 919-981-5795. And as always, begin your home shopping experience at jasonbgraves.com. I want to help you!

 

This blog post is brought to you by Jason B. Graves and Scott Graves at Raleigh Real Estate Blog. We are part of the Triangle Real Estate Group.