This article was last updated on June 28
Thanks to recent announcements by the Federal Reserve around cutting back on quantitative easing (QE) stimulus measures interest rates have been rising, with the forecast for even higher rates by year end. Based on data from Quicken, America’s #1 Online Lender, rates have been rising consistently of late with the 30-year fixed rate averaging over 4.1%. That’s up from 3.5% a little more than two months ago. Many have said that rising interest rates are going to put brakes on the housing recovery. But history and evidence suggest otherwise.
First, the current situation: Home prices have been rising despite a tepid economy and mortgage rates are still at historic lows. Home prices are up over 10% nationally from last year, and in some parts of California, Florida and Arizona prices are up over 20% according to the Standard & Poor’s Case-Shiller home price index. Yet despite the impressive rise, prices are still well below pre-financial crisis (2008) levels in most areas across the country [See How Much Your Home is worth today at Zillow.com]. Meanwhile, while mortgage rates having been trending higher, they are still far lower than double digit rates seen in the nineties and high single digits during the 2001-2005 housing market boom.
So here is why current conditions and higher rates will not really hurt the housing recovery. In fact they may just continue the current trend of rising home prices
More buyers getting off the fence as rates rise. Many potential or actual home buyers have been staying on the sidelines looking for the right opportunity to buy. Rates have been relatively steady over the last couple of years and so a sense of malaise has settled in. But with rates rising, a half percent increase could make a $200 to $500 difference in the monthly payment, many buyers will be rushing into the market to close on purchases before rates go even higher. Coupled with lower new home and distressed housing (short sales, foreclosure) inventory home prices will rise as buyers get more serious about making a purchase.
Higher rents are also pushing more people towards buying. Rents have risen much faster than interest rates and for those with stable jobs and looking for more space, home buying is about as attractive as ever. Again the urgency to go from renters to owners will rise as rates seem to be trending up for good.
The economy and employment are improving. Despite only tepid, 1 to 2 percent, economic growth and unemployment hovering around 7.5 percent, things are looking up for the US economy. Most people have much more stability in their jobs and overall financial situation. For those renting, this means getting off the fence and buying a home before rates rise even further. And for some it means upgrading to a bigger place after being stuck is a smaller home for the last 5 years. All this will drive more buyers into the market, raise demand and boost home prices. Basic Economics 101 one could say!
Home prices still have a lot of upside. While the mainstream media loves to report on booming home prices or bubbles in certain areas like San Francisco or Las Vegas, there are far more communities where prices are still considerably below from their peaks. This means deals are to be had and with more buyers in the market, demand for these homes should boost average and median prices.
Banks easing lending and credit restrictions. As rates have gone up, a number of financial institutions have started easing some of their draconian lending restrictions instituted following the housing/financial credit crisis. This will provide more affordability to current home buyers and encourage new buyers into the market which should keep the housing recovery intact.
Shifting from fixed to adjustable rate loans. While longer term this is probably not a great trend, more new home buyers are shifting from from traditional 30 year fixed rate loans to shorter duration (e.g. 15 years) or adjustable-rate mortgages to secure lower rates (compare the difference here). The appeal and increased availablity of adjustable rate mortgages, with their lower rates, will drive down the cost of home ownership and boost overall demand.
The above are just some of the factors that will lead to a continued rise in home prices across the nation. Regionally markets will differ in home price changes but the overall trend is up. So there is no need to get scared of higher rates, unless you are a desperate home buyer that is.