Interest rates for a 30-year fixed rate mortgage have climbed from 3.95% in the first week of January up to 4.61% last week, which marks a 7-year high according to Freddie Mac. The current pace of acceleration has been fueled by many factors.
Sam Khater, Freddie Mac’s Chief Economist, had this to say:
“Healthy consumer spending and higher commodity prices spooked bond markets and led to higher mortgage rates over the past week. Not only are buyers facing higher borrowing costs, gas prices are currently at four-year highs just as we enter the important peak home sales season.”
“Healthy consumer spending and higher commodity prices spooked bond markets and led to higher mortgage rates over the past week.
Not only are buyers facing higher borrowing costs, gas prices are currently at four-year highs just as we enter the important peak home sales season.”
Investopedia explains the relationship like this:
“The price of oil and inflation are often seen as being connected in a cause-and-effect relationship. As oil prices move up or down, inflation follows in the same direction.”
You may have noticed that filling your gas tank has become substantially more expensive in recent months. The average national gas price has climbed nearly $0.50 from the beginning of the year, leading to the highest price for Memorial Day weekend since 2014.
As rates go up, your purchasing power goes down, but don’t worry; rates are still well below the averages we’ve seen over the last four decades.
“Freddie Mac said this year’s higher rates have not yet caused much of a ripple in the strong demand levels for buying a home seen in most markets, but inflationary pressures and the prospect of rates approaching 5 percent could begin to hit the psyche of some prospective buyers.”
Buying sooner rather than later will help lock in a lower rate than waiting, as the experts believe rates will continue to climb. Even a small increase in interest rates can have a big impact on your monthly housing cost.
If you are planning on buying a home this year, keep an eye on gas prices the next time you’re at the pump. If you start to feel a big jump in price, know that rates are probably on their way up, too.
There are many unsubstantiated theories as to why home values are continuing to increase. From those who are worried that lending standards are again becoming too lenient (data shows this is untrue), to those who are concerned that prices are again approaching boom peaks because of “irrational exuberance” (this is also untrue as prices are not at peak levels when they are adjusted for inflation), there seems to be no shortage of opinion.
However, the increase in prices is easily explained by the theory of supply & demand.Whenever there is a limited supply of an item that is in high demand, prices increase.
It is that simple. In real estate, it takes a six-month supply of existing salable inventory to maintain pricing stability. In most housing markets, anything less than six months will cause home values to appreciate and anything more than seven months will cause prices to depreciate (see chart below).
According to the Existing Home Sales Report from the National Association of Realtors (NAR), the monthly inventory of homes for sale has been below six months for the last five years (see chart below).
If buyer demand continues to outpace the current supply of existing homes for sale, prices will continue to appreciate. Nothing nefarious is taking place. It is simply the theory of supply & demand working as it should.
Why are home prices still rising? It is a simple answer. There are more purchasers in the market right now than there are available homes for them to buy. This is an example of the theory of “supply and demand” which is defined as:
“the amount of a commodity, product, or service available and the desire of buyers for it, considered as factors regulating its price.”
When demand exceeds supply, prices go up. This is currently happening in the residential real estate market.
Here are the numbers for supply and demand as compared to last year for the last three months (March numbers are not yet available):
In each of the last three months, demand (buyer traffic) has increased as compared to last year while supply (number of available listings) has decreased. If this situation persists, home values will continue to increase.
The reason home prices are still rising is because there are many purchasers looking to buy, but very few homeowners ready to sell. This imbalance is the reason prices will remain on the uptick.
Recently, Freddie Mac published an Insight Report titled Nowhere to go but up? How increasing mortgage rates could affect housing. The report focused on the impact the projected rise in mortgage rates might have on the housing market this year.
Many believe that an increase in mortgage rates will cause a slowdown in purchases which would, in turn, lead to a fall in house values. Ultimately, however, prices are determined by supply and demand and while rising mortgage rates may slow demand, they also affect supply. From the report:
“For current homeowners, the decision to buy a new home is typically linked to their decision to sell their current home… Because of this link, the financing costs of the existing mortgage are part of the homeowner’s decision of whether and when to move. Once financing costs for a new mortgage rise above the rate borrowers are paying for their current mortgage, borrowers would have to give up below-market financing to sell their home. Instead, they may choose to delay both the sale of their existing home and the purchase of a new home to maintain the advantageous financing.”
“For current homeowners, the decision to buy a new home is typically linked to their decision to sell their current home… Because of this link, the financing costs of the existing mortgage are part of the homeowner’s decision of whether and when to move.
Once financing costs for a new mortgage rise above the rate borrowers are paying for their current mortgage, borrowers would have to give up below-market financing to sell their home.
Instead, they may choose to delay both the sale of their existing home and the purchase of a new home to maintain the advantageous financing.”
The Freddie Mac report, in acknowledging this situation, concluded that prices are not adversely impacted by higher mortgage rates. They explained:
“While there is a drop in the demand for homes, there is an associated drop in the supply of homes from the link between the selling and buying decisions. As both supply and demand move together in this way they have offsetting effects on price—lower demand decreases price and lower supply increases price.
They went on to reveal that the Freddie Mac National House Price Index is…
“…unresponsive to movements in interest rates. In the current housing market, the driving force behind the increase in prices is a low supply of both new and existing homes combined with historically low rates. As mortgage rates increase, the demand for home purchases will likely remain strong relative to the constrained supply and continue to put upward pressure on home prices.”
The following graph, based on data from the report, reveals what happened to home prices the last six times mortgage rates rose by at least 1%.
Whether you are a move-up buyer or first-time buyer, waiting to purchase your next home based on the belief that prices will fall because of rising mortgage rates makes no sense.