By our guest writer Bob Cahill:
Of course no one really knows if the increase in mortgage rates will cool a hot housing market. The answer depends on factors that are worth watching in the coming months, especially if you’re in the market to purchase.
First of all, positive economic conditions and improved employment have resulted in the Fed forecasting their Bond Purchase exit strategy that will likely begin soon and complete some time in 2014 if economic, employment and inflation conditions meet expectations that the Fed has outlined. This mention by the Fed has resulted in a major sell-off in mortgage bonds and treasuries which have increased treasury yields and rates on conventional 30 year fixed rates by approximately 1%.
Second, home sales and values may actually see some near term additional increase due to buyers that are in the market now looking to move more quickly to lock in rates before they continue to rise. However, the impact on future values and sales is the concern that we’re all apprehensive about especially considering how important a strong housing market is to the broader economy, consumer confidence and our own personal home ownership dreams.
To attempt to quantify a 1% rate increase for a family earning $100,000/yr and purchasing a home with a $400,000 mortgage I’ve calculated the increased monthly cost and impact on total monthly debt. This resulted in an increased housing expense of ~$230/m or ~3% in terms of total debt from say 34% to 37%. The impact to a higher net worth families will of course be less significant. It’s my opinion that the current demand in the housing market will be able to absorb such an increase and 30 year rates in the 4.50% to 5% range but the markets will be the only one to determine what can and will be tolerated.
Considerations if you’re in the market to purchase:
- Interest rates swings on a daily and weekly basis during the current market have been significant
- Budget total housing payment based on current interest rates at time of loan pre-approval
- Obtain interest rate quotes at the time you’re presenting an offer so you know what your payments will be
- Be prepared to lock your interest rate once your offer has been accepted especially during current volatile times
- You can of course also float your rate and lock later but this should be managed closely
- Impact of higher rates and monthly costs typically impact first time buyers more significantly
Bob Cahill is a Senior Mortgage Banker with Leader Bank N.A. (www.leaderbank.com/agent/cahill). He can be reached at 781.589.8756 or email firstname.lastname@example.org.
- Stay in close contact with your mortgage professional when purchasing