by Jessica Swesey
Inman News
The nation’s housing markets achieved a record high pace of sales in July but the heightened activity may be more a sign of slowing to come than a signal of a continued bull market. The trigger in both instances is higher mortgage interest rates, which push waffling home buyers off the fence into home purchase transactions, then force marginal or noncommittal buyers out of the market altogether.
Experts agree the days of 5 percent mortgages are over and higher monthly payments inevitably will force the housing market to slow down. Buyers will find homes to be less affordable than they recently were and sellers won’t realize as much house value appreciation as they’ve netted in recent years.
“Long-term rising rates definitely impact the market as far as slowing (home) sales,” said Leslie Appleton-Young, chief economist of the California Association of Realtors.
That’s because higher interest rates “deteriorate” affordability, she said. Financing a home purchase becomes more expensive and fewer buyers can qualify to purchase a median-priced home as interest rates rise.
Existing-home sales in July posted a remarkable annualized pace of 6.12 million units, the National Association of Realtors reported. But those sales include buyers who locked in their mortgage interest rates in early summer. The effect of higher financing costs won’t show up until later this year when NAR figures will include buyers who started their home searches after interest rates hiked higher.
Home shoppers today face higher monthly mortgage payments than buyers who locked in their rates just two months ago faced at that time. For example, the 1 percent spike in long-term mortgage rates this summer added an extra $127 to the monthly payment on a $200,000, 30-year home loan at a 6.28 percent interest rate.
An extra $127 a month might still be affordable for buyers who already own a home and have built up equity. But it could be a deal-breaker for first-time buyers, who made up about 40 percent of all home purchase transactions early this year, according to NAR.
Housing affordability drops 1-2 percentage points with every 50-basis-point increase in long-term mortgage rates, according to C.A.R. Research Analyst Sara Chaloen. That means the affordability index in California would fall three points if the average interest rate on 30-year fixed-rate mortgages increased to 6.5 percent. And that would prevent 360,000 households from buying a median-priced home in the state.
Rock-bottom mortgage rates earlier this year helped maintain affordability in California, despite double-digit home price appreciation.
“If the mortgage rate had not dropped by more than one percentage point from a year ago, housing affordability would have been hit hard in recent months because of the constant rise in the median home price,” Chaloen wrote.
Meanwhile, San Francisco, Denver and Boston already are plagued with affordability problems, according to David Stiff, manager of econometric research at Fiserv CSW.
“If rates jumped up even higher it would kind of be adding insult to injury,” he said.
Stiff said home prices in those three cities would flatten or decline if long-term mortgage rates climbed toward 7 percent. He said weakened local economies in those areas have added stress to household budgets since the technology bust.
Some first-time buyers will have to lower their expectations and settle for a smaller house, a less desirable neighborhood or a longer commute than they intended, Appleton-Young said.
“People start making choices based on the fact that their first choice is now unattainable,” she said.
Realty agents can keep buyers in the market during slower sales periods by suggesting alternative mortgage products, said Lee Finch, principal broker for Re/Max Greater Atlanta. A mortgage with a short-term initial fixed interest rate or an adjustable rate can be more affordable than a long-term mortgage.
Some home loan programs could result in the same monthly payment for a portion of borrowers even when long-term interest rates increase, he said.