Interest rates

INTEREST RATES ARE PREDICTED TO RISE

The days of as low as 3.5% rates are over. Mortgage interest rates are expected to rise to close to 5% during the year 2017. In comparison to 16% rates only 10-15 years ago, 5% should still create a viable market. However, this change in rates is expected to have the most effect on the large amount of millennials that will become first time home buyers.

The effects of rising interest rates are caused in conjunction with low inventory. Many of the houses on the market are resale, not new construction. It is predicted that inventory will still be low in 2017. This is because homeowners with low mortgage rates are going to be less likely to move if a new house comes with a higher interest rate and they are sill at the same level of income. Income growth could change this outcome however so it is something to watch.

Inventory and affordability go hand in hand according to the law of supply and demand. With rising rates and low inventory, affordability will continue to be an issue for large markets. Supply will be scarce and demand will be higher, so prices will go up (good for people who want to sell).

As a buyer, you can make up for the effects of rising rates. Home buyers can look for lower-priced homes, can put more money down, or change the term length on a mortgage fixed-rate component.


THE EXPERTS’ OPINION

On income growth...“If income growth picks up, then the rise in interest rates will affect refinancing, but not the home purchase activity. If incomes start to grow more strongly, it probably won’t affect buying as much as refinancing,” Doug Duncan

On predicted rates…“My forecast is for the 30-year fixed rate to rise above 4.5 percent by year’s end, and worst case scenario, knock on the door of 5 percent.” Matthew Gardner

On inventory…“How do we address the fact that the existing homeowner, the largest single source of housing supply, has a built-in financial disincentive to make that supply move?” Mark Fleming

On affordability…“The average price of a new home is increasing still; we’re not serving the mid to lower-tier market with new home construction. So you’re not going to see much relief in affordability.” Steve Cook

On effects on buyers…“People who are repeat buyers or buying higher-end homes won’t feel it so much.” Svenja Gudell

On the economy….“It’s been close to seven years since we had a recession, and they tend to move in 7-to-10 year cycles; if it’s not next year then the chances go up. There aren’t any signs yet that that is imminent; there are a lot of signs that suggest otherwise, but there are a lot of wild cards at this point that both buyers, sellers and agents need to be aware of.” Ralph McLaughlin

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