The Fed was supposed to raise rates earlier in the year.
Then in June.
Then in September.
Trying to figure out when rates might actually go up is harder than trying to pinpoint which Kardashian will be the subject of the next mini-scandal. Nevertheless, all signs point to rates rising before the end of the year.
So what does that mean for L.A. homebuyers? Not the pundits or the glut of cash buyers in the market for whom interest rates are a non-issue. I’m talking about real people who are trying to save their money and time the market right to make the jump from renting or move up to a larger home.
Well, it ain’t great news. But it’s also not the end of homebuying as we know it.
Higher rates mean higher house payments
House for house, you’re gonna pay more. Here’s how much:
- On a $400,000 house at 3.75% with an FHA loan, you’d pay $2,525.66 per month today, all in.
- On that same house with the same terms at 4.75%, you’d pay $2,755.44 per month.
(Those numbers are based on a $400,000 FHA loan including a 1.150% property tax rate, PMI of .85% PMI, homeowner’s insurance of $600, and the required upfront FHA funding fee of $6,755.)
Is $200+ more per month enough to drive a first-time buyer out of the market or make a move-up buyer reconsider? For some, yes. It’s about affordability, of course. But it’s also about confidence.
Consumer confidence rules
The problem with rising rates and therefore payments is that it can make buyers feel shaky about their investment. Funny thing is, the fed yanks up rates as a result of consumer confidence—low employment makes one think it’s a good time to tinker. But the downside is that confidence takes a hit if buyers no longer believe they’re getting a good value from a home purchase that costs them more today than it did yesterday.
And it doesn’t take much to shake their confidence. CNBC reported a 6.7% dip in mortgage applications this week based on interest rates that are “swinging relatively widely day-to-day, due to volatility in the U.S. stock market and overseas financial markets”—this despite the fact that rates were static for the week and are still near record lows.
Especially troubling is what Good Morning America said during a segment recently: If interest rates rise 1%, it can cause the cost of housing to jump 10%. Whether that’s true or not remains to be seen, but sit for a moment with the idea that the $2,755.44 house payment at 4.75% goes up to $3,026.10 assuming a 10% price increase.
When rates do rise, here’s hoping it doesn’t kill current real estate market momentum and make buyers reconsider. It is my sincere feeling that homeownership is the best investment you can make, both for future growth and personal satisfaction. Not to mention that fact that rents are out of reach and out of control all over Southern California.
So what should buyers do?
If you ask Money Magazine, they say: buy.
“People thinking of buying a house should act quickly to lock in today’s low rates,” they quoted Dean Croushore, an economics professor at the University of Richmond and former Philadelphia Fed economist.
I agree. Despite this recent mortgage application dip, there have been hordes of buyers looking to lock down a pre approval before rates and prices rise—not to mention “a big rush of mortgage applications in 2015, driven by people refinancing to lock in lower interest rates.”
There is an upside to higher rates. No, really.
“Savers succeed,” said Money Magazine. “Ever since the financial crisis, folks who put their money in the bank have gained next to nothing. With interest rates so low, people who played it safe have been getting the short end of the stick. That will change for the better for people with savings accounts. Once the Fed raises interest rates, savers will gain more interest on the money they deposit at their bank.”
So, at least those who’ll be stuck renting for while longer will be able to save for a down payment at a faster rate.
Tripp Jones Real Estate for Santa Clarita and San Fernando Valleys, Call 661-733-4555 or 818-527-6292