Real estate industry watchers are apprehensive about possible effects of rising interest rates on affordability. Yes, rising rates do affect affordability and no, maybe not as badly as one who is considering buying or refinancing a home may think. The real answer, as it is to many things, is that “it’s complicated.”
Lower interest rates translate into lower monthly mortgage payments and more. For homebuyers who qualify for larger loans, lower interest rates enable buyers to purchase “more house.” There is more competition in the loan market because would-be buyers jump on cheap financing. Lower rates also affects your overall purchasing power for everything, not just homes.
Take a look at how each quarter of a per cent rise in rates affects your monthly payments with this example…use the median home value of $199,200…one buys \ a home for $200,000 with an average 10% down. The financing would be for $180,000. A payment at 3.875% on the principal and interest would be $846./month. A payment at 4.125% on principal and interest would rise to $872./month. The increase is just less than $26./month. Could your buyer still afford their potential house with this slightly higher rate?
Know and remember that higher rates are often offset by lower prices. The over-the-top markets, San Francisco/Silicon Valley/Miami, continue to experience high prices with no price offset regarding increasing interest rates. However, “normal” markets where prices are still undervalued such as Chicago/Detroit/Atlanta, prices have historically dropped and/or maintained when interest rates rise.
A report appearing in CNBC by John Burns, a real estate consultant, indicates that housing inventories play as significant a role in affordability as do interest rates. Lack of inventory pushes prices up. This is particularly hard for first time buyers. Where inventories are balanced with demand, however, look at that chart below and remind yourself that rising interest rates tend to push home prices down.
First time home buyers may or may not be able to play the location/relocation game to take advantage of this dynamic but, when all things are said and done regarding new employment opportunities in such places as Detroit, first time buyers may be able to get a jump on the market by moving to and working in “balanced” locations that still have affordable housing opportunities.
“Complicated” yes; doable, perhaps…even with higher interest rates.