After years of extremely low interest rates, we are seeing signs that rates have bottomed and may continue to increase in the coming year. The yield on the 10-year Treasury, a benchmark interest rate, went from 1.8% on Sept. 30 to 2.4% yesterday. This includes the largest 2-week rise since 2001! Mortgage rates followed suit — click on chart at left to view. The 30-year mortgage is now back at 4% vs. 3.4% just a month ago. So what does this mean for those looking to buy, refinance or sell in today’s real estate market?
If you didn’t lock in your mortgage rate before the jump that just occurred, you may have missed a once in a lifetime opportunity. Rates are not likely to go back down dramatically.
That’s because long-term US interest rates – including mortgage rates – are driven by the outlook for US inflation and economic growth. Both of these factors are trending upward. Inflation has accelerated in each of the last three months (through October) and economic growth rose to 3.2% for the third quarter 2016.
In addition, a President Trump/Republican administration is expected to enact a pro-growth fiscal policy (higher government spending, tax cuts, etc.). The result is that interest rates are not likely to fall dramatically from current levels, although there might be a pull-back in the short-term given how dramatic the post-election jump has been. While a December interest rate increase by the Federal Reserve is widely expected – and largely built into current rates – we could see two more such increases in 2017.
So what does a shift in mortgage rates mean for the housing market? Higher interest rates limit a home buyer’s purchasing power. While the recent 0.6% rise in mortgage rates may not seem like much, it is significant. Someone who can pay $3,000/month for the principal and interest on a mortgage (and has the 20% down payment) can now afford a $630,000 mortgage vs. $680,000 at the end of September.
Is there a bright side to the increases for house buyers? Potentially. The lack of affordability could put downward pressure on the market and keep home prices from rising. In housing, each micro-market tends to have different price points and dynamics. However, without external pressures creating increased demand (i.e. lots of well-paid people moving to a city) the runaway housing prices of recent years could see a slowdown.