Why Are Mortgage Rates Rising?
As a mortgage professional, for over 30 years, I’m just going to say it; we are have been blessed…and spoiled! Having seen up markets, down markets, and everything in between, I can assure you that the rates for the past ten years have been a blessing. Why? Let’s take a look back and a look ahead while we review how rising mortgage rates may impact the housing market for the coming months and years.
Let’s back up. It may help to understand that for the past TEN years we have had a mortgage market that has, in essence, been subsidized by the federal government – yes, the rates have been kept artificially low to help unwind the real estate crisis from 2008. Not to get too technical, but the federal government had been buying the mortgage loans at artificially low mortgage rates to help the housing industry rebound and to stimulate the economy. That program has been phasing back with a planned conclusion in 2018. This environment provided some of the lowest rates we have ever seen. So, are we surprised that mortgage rates are on the rise? Absolutely not. As a matter of fact, in Chart 1.1, you will see the Federal Home Loan Mortgage Corp’s 2018 prediction of mortgage rates from December 2017. Their prediction has pretty much been spot-on correct – and they expect it to continue.
Mortgages are now, once again, being purchased by the ‘free-market’. So, when it comes to the ‘free-market’ and mortgage rates, the better the economy does, the more mortgage rates will likely climb. Obviously other factors can influence the depth and speed at which it occurs, but the bottom line is that to investors on Wall Street mortgages are, in essence, 30 year bonds with fixed rates of return. If the economy is growing and the cost of living is increasing – these bonds are less attractive to investors. To make them more attractive, the returns (rates/yield) must increase – it’s almost an economical certainty.
The Impact of Rising Mortgage Rates
Rising mortgage rates cause monthly mortgage payments to be higher and therefore, may limit buying power. For example; if you were to buy a $400,000 home with no money down at a 4.75% rate, your monthly Principal and Interest payment would be roughly $2,086. If the current trend continues, and rates rise (let’s say to 5.75%), your monthly payment could be $2,334 in ONE YEAR! So, you’d be paying almost $300 more per month (or $3,000 more per year) for the exact same house.
Let’s take this one step further. For someone making $8,500 per month, it may mean they can buy a $400,000 home today. However, if the trend or rising mortgage rates continues, as we believe it will, that same $8,500 per month wage earner may only qualify to buy a $357,000 home. In short, the twelve month wait to buy a home could cost them $43,000 in buying power. In addition, on the same loan, say $400,000, that 1% increase in rate would represent an increase from $351,172 to $440,345 in interest cost for the same house, an increase of $89,173 in ONE YEAR!
As with all projections, or as we call it in the business ‘guestimates’, nothing is guaranteed. But, all indications show a definite trend and most experts agree that buying power is going to be directly impacted. What does that mean for you? If you are considering buying a home in the next 12 months, you better get busy! You’ll likely get more home for the money right now! Likewise, if you are considering selling a house now is also the time! Your potential buyers may not be able to afford your home in 12 months, so why wait?
GUEST BLOG: David Ratti (NMLS# 532652) is a licensed mortgage banker and leader of the Ratti Lending Team at Envoy Mortgage. Mr. Ratti has been in the mortgage business for over 30 years and is a strategic partner with The Donnelly Group of Keller Williams Flagship of Maryland. He can be contacted at DRatti@EnvoyMortgage.com
NOTE: Comparisons based on 4.75% current, vs 5.75% future. No predictions are implied or assumed, and mortgage rates can go up or down. Comparison is based on a continuance of the previously twelve months trend solely for education purposes.