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By all indicators, it’s pretty clear that the Fed will raise rates a few more times this year. Predictions are that the mortgage rate for a 30-year fixed rate loan may hit 5%. That seems like a pretty big jump from not too long ago.
We know the effects that rising rates have on the refinance marker but what about home sales? With home values accelerating and rates rising, will fewer people be able to afford a home? As usual, it all depends on the economy.
Rates are rising because of a strengthening economy and fears of inflation. This is not necessarily a bad thing. It indicates that things are getting better and the government no longer needs to artificially boost the economy.
So, how might this affect home sales and mortgage loans? It will take a little more income for someone to afford and qualify for a loan, but how much? Let’s take a look.
Say someone buys a home today at $250,000, puts 5% down ($12,500) and finances at 4.25%. Their P&I payment would be $1,731 per month. If rates hit 5%, for that same home the monthly P&I increases to $1,838.
The buyer would need to pay an increase in their monthly payment of $107 per month, or $1284 a year. At an income of $70,000 annually, that would require an increase in their annual income of about 1.8%, all other things being equal.
So, mortgage rates will probably hit 5%. To keep pace, buyers’ annual income would not need to increase all that much, if at all. That seems realistic in an improving economy, especially considering the recent tax cuts for many.
This doesn’t take into account the potential for the return of ARM products with lower start rates. With some consumers once again seeing the potential for upward mobility and increased wages, they may consider these ARM loans as a way to qualify and afford their home today rather than wait.
Rising rates alone should not have a major negative effect on an improving housing market. Those who can qualify for loans today will be able to so down the road. As a byproduct, the rising rates may also stem the rise in home prices bringing more buyers to market.
As they say, a rising tide lifts all boats. As the economy strengthens, although rates and home values rise, so will consumers’ income and buying power.
Homeownership is still the basis for the American Dream and that Dream is still alive and well. Let’s be ready to finance it for as many consumers as possible.
