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What Effect Will Rising Rates Have?

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rising rate

Maybe less than you think.

According to Forbes: Rising mortgage rates are making consumers nervous and discouraged. Higher rates make housing less affordable and should help slow home price gains from a rapid boil to a gentler simmer. But so far, the effect of rising rates on the housing market – aside from the drop in refinancing – has been limited and is unlikely to derail the housing recovery. Why? Four reasons:

  • Mortgage rates are rising alongside a strengthening economy, boosting housing demand. By themselves, rising rates make housing more expensive and hurt housing demand. But rates aren’t rising in a vacuum. After a severe recession, economic recovery tends to push interest rates higher as demand for credit increases and investors worry more about inflation. Furthermore, the Fed has tied its plans to taper bond-buying to signal that the economy is getting stronger. Therefore, by design, the strengthening economy should boost housing demand at the same time that rising rates dampen housing demand.
  • Inventory remains tight, making it hard for homebuyers to rush their purchase. Even though the number of homes for sale has recently started to increase, inventory remains tight. That means buyers who want to find and buy a home quickly to beat rising rates might be held back by slim pickings. In fact, among survey respondents who actually plan to buy a home within the next year, not being able to find a home they like edges out rising mortgage rates as their #1 worry.
  • Rising rates could lead to expanded mortgage credit. Mortgage rates matter – but only if you can get a mortgage in the first place. Although credit might be starting to open up for the most qualified buyers, credit remains tight. But rising rates could have a silver lining: as refinancing demand dries up, banks might look to expand their home-purchase lending instead. When rates were at their low point last fall, refinancing accounted for more than 80% of mortgage applications, so the recent drop in refinancing leaves a big hole in banks’ mortgage business that home-purchase loans could fill. Even though consumers are anxious about rising rates, we bet they’d rather have a 5% loan that they can actually get than a 3.5% loan they can’t get.
  • Buying is still a lot cheaper than renting. There’s no question that rising rates make home-buying more expensive than it was a few months ago. But we can’t turn back time: the choice is not to buy now or six months ago. Rather, the choice that many consumers face is whether to buy or rent today at current prices, rents, and mortgage rates. Right now, that math still makes buying look like the better deal – by far. Even with a 4.5% 30-year-fixed mortgage, buying is 37% cheaper than renting nationally; that’s because a 4.5% rate is still very low by historical standards, and prices are still modest relative to rents. Nationally, renting doesn’t get cheaper than buying until rates reach 10.5%, though the tipping point is below 6% in the Bay Area and Honolulu.

Full article here.

For a free consultation on exactly how rising rates could affect your home purchase or refinance contact the RealEstateProphets for personalized advice.

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