Oh No....Interest Rates Are Rising!

Oh No....Interest Rates Are Rising!

Below is information compiled from multiple real estate economists/strategists. It is hoped this full article can be helpful to you in your discernment to buy (a home) now or buy later

“I anticipate the 30-year fixed mortgage rate to hover around 3.9 percent next month, with the 15-year fixed rate between 2.9 percent and 3.0 percent,” says Nadia Evangelou, director of forecasting for the National Association of Realtors. “Rapidly rising inflation and expectations that the Fed will raise short-term interest rates as soon as this month will continue to push up mortgage rates. March is also the month when the Fed’s asset purchase program is set to end. That means the current economic stimulus policies will conclude very soon.”

Greg McBride, Bankrate’s chief financial analyst, foresees even costlier rates.

“With inflation figures continuing to surprise to the upside, mortgage rates will remain above 4.0 percent on the 30-year fixed and above 3.25 percent on the 15-year fixed mortgage in March. The wildcard is the extent to which news like Russia’s invasion of Ukraine takes center stage, as the impact on mortgage rates could go either way,” he says.

The world is intently focused on Eastern Europe and images of bombs, tanks and troops. Sanctions against Russia could shape the direction rates head in the forthcoming weeks.

“Tensions between Russia and Ukraine might affect global markets. This could cause mortgage rates to fall, as more investors would move from stocks into the safety of bonds,” adds Evangelou. “However, the Fed will likely raise short-term interest rates as soon as this month, thereby moving up mortgage rates.”

An even bigger catalyst on rates than the Ukrainian conflict may be the lingering specter of inflation.

So, what do we do with this?  Some say 'don't buy now!' Others say you have to catch the right deal.' And still others are saying 'the economy is still strong and home prices and rates will keep going up...and so it's buy time.'

One thing is certain..there is nothing certain about this climate.  

In the days of uncertainty you have to always go to the 'knows'.  We know a few things and it should help us make a very wise educated decision.

What do we know?  We know that interest rates have gone up in the past six months.  Who cares about interest rates?  They are what they are correct?  Well, not exactly.  Let's look at an example:

$400,000 mortgage = 3.25% interest rate - $2074.15 per month (assuming $3000/yr tax and $1000 insurance)

That same $400,000 mortgage = 4.25% interest rate- $2301.09 per month (same assumptions above)

Difference = $226.94 per month = $81,698.40 more in payments over the next 30 years.


Rate Payment Max Price Buying Power Difference
3.875%  $1,900  $380,000  $0
4.375%  $1,900  $363,000  -$17,000
4.875%  $1,900  $345,000  -$35,000

When interest rates go up a buyer's buying power goes down. Take the chart above...if interest rates go from 3.875% to 4.875% a buyer loses approx 10% in buying power (ie. $380,000 to $345,000).  at 4.875% a buyer can only afford $345,000 instead of $380,000 at 3.875%

What about home prices? Home prices are projected to go up 36% over the next five years (says fannie mae and freddie mac).  That is an average 7% each year.  A 7% increase in one year on a $400,000 home would make the home's value $428,000 after 12 months.  After two years it would be worth $457,960.  

Even if prices begin to go down it will take several years to get back to today's pricing due to the overwhelming evidence that our market prices will continue going up for the foreseeable future.

Prices are going up too much so it's best to wait until the market goes back down.  A few things to consider with the home prices.         

- Less than 2% of home owners are upside down.  When the market tanked at the end of 2007 almost  half of the homes were leverage and were barely worth what they could sell for. 


 - Inventory levels - currently there is a 1.4 million home shortage.  With supply being way below demand for homes on the market and a tremendous shortage of available homes for sale it's likely to take years to get inventory back in balance.

 - There is much talk about 'all these foreclosures' coming on the market.  Did you know that 92% of owners removed themselves from the government assistance. This means the foreclosures are not happening like they were projecting.                                                                                                                                    

- inflation - some are saying that inflation is out of control and therefore home prices will fall due to this.  In the beginning phases of these steep increases in inflation just the opposite is happening. Investors know they can place their money in real estate and thus shield from inflation...and this is making home prices go up even more.

I'm Selling and Buying - if you are selling and buying a home the ONLY factor to watch is the interest rates. You will sell for a great price and you will pay a great price.  It's a 'wash' so to speak.  Yet the interest rates are what you carry for 30 years.  If you plan to sell and buy do it as quickly. Every day you wait you are losing buying power.

Bottom line:  All signs point to the market continuing going up.  If the bubble bursts and the market shifts there is great evidence that home prices will slowly decline...yet that is likely going to be a few years from now...and before that will be years of prices going up first.  The best advice is - Go buy a home!

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