A recent, sharp rise in mortgage-interest rates has raised concerns
about whether the housing recovery will soften as home loans become more
Last week, the average rate nationwide for a 30-year mortgage jumped
to 4.46 percent from 3.93 percent — the biggest one-week increase since
1987 and the highest rate since July 2011, according to the Federal Home
Loan Mortgage Corp.
“We do think that, as rates go higher, there will be additional
affordability issues,” said Brad Hunter, a Florida-based economist for
the real-estate research firm MetroStudy Inc.
“Everyone is getting nervous now as the Fed is taking away the
Kool-Aid bowl soon,” he said. Rates started moving up after the Federal
Reserve said on June 19 that it might end its economic-stimulation
program by the end of this year or in 2014.
An increase in interest rates could temper the housing recovery in several ways.
For one thing, higher rates would mean prospective buyers could
afford less house, possibly easing demand for new and existing homes.
For another, the equity funds that have been buying up foreclosures
would likely go looking elsewhere for better ways to invest their money,
which would likely limit competition for new listings. Home builders
may be pressured by higher carrying costs, even as fewer prospects show
up to tour their model units. And homeowners not interested in selling
would be less likely to refinance their existing loans.
Here’s a closer look at how rising rates could affect those four groups:
Buyers: For home buyers, many of whom have struggled
since the Great Recession and global credit crisis to qualify for
mortgages, an uptick in rates would also cut into their buying power
once they are approved for a loan.
For example, buyers who obtained a $200,000 mortgage when interest
rates were about 3.5 percent in April landed a monthly payment of about
$900. But if rates head north to 5 percent, buyers hoping to get that
same monthly payment would have to limit their mortgage to $170,000 — or
$30,000 less than they could have afforded with the lower loan rate.
In a talk to Congress last month, Fed Chairman Ben Bernanke noted
that housing’s vital role in the nation’s economic recovery is due
partly to the real estate-related jobs it creates “but also because
higher house prices increase consumer wealth and promote consumer
Over the 30-year life of a $200,000 mortgage, however, a home buyer
would pay an additional $63,000 in interest with a 5 percent rate than
with a 3.5 percent rate — money not available for spending on consumer
goods or services.
And even though mortgage lenders stand to earn more money with higher
rates of return on their loans, borrowers would not find it easier to
qualify for home loans should interest rates keep rising, said Rob
Nunziata, president of Orlando, Fla.-based FBC Mortgage LLC.
“With some of the new regulations taking effect soon, such as QM —
qualified mortgage — I think you will see lenders actually tighten
guidelines as opposed to loosen them,” he said.
The qualified mortgage rule, issued by the federal government’s
Consumer Financial Protection Bureau, aims to crack down on loose
lending practices. Among other provisions, it does not allow mortgages
that would bring a home buyer’s total monthly debt payments, including
property taxes and insurance, to more than 43 percent of the person’s
Investors: Institutional buyers are likely to slow
the pace of their distress-sale home purchases if interest rates rise
and other investments become more attractive. Whether they also dump the
properties they have already purchased or hang onto them would depend
on the demand for single-family-home rental properties.
“I think the major equity players, like Blackstone (Group), that
brought volume purchases to the real estate industry will retreat from
the purchase of individual homes,” said Owen Beitsch, senior principal
of Real Estate Research Consultants of Orlando. “This asset class is
simply much too management-intensive, and the spread between cost and
return is decreasing.”
John Tuccillo, chief economist for Florida Realtors, said he expects
the pace of investor purchases to slow “during the next year or so.” He
added that, while he doesn’t expect equity funds to sell off their newly
acquired houses, he figures they will cut back on picking up new ones.
Diminished demand for investment houses would put pressure on prices
to fall, though areas with low inventory would more easily handle an
increase in available properties without prices tanking.
Builders: Homebuilders would also have to adjust as
prospective buyers grapple with reduced spending power. A certain slice
of that group would scale back their search to existing-home listings,
said Hunter, the MetroStudy economist. Others would settle for smaller
new homes or for developments in more-remote locations, he added. And
builders would face costlier carrying costs for land and materials as
they wait for enough buyers to close out a project.
In the short term, Hunter said, the jump in interest rates could give
the market a boost, as prospective home buyers who have been hesitating
to act decide to buy now, assuming rates will only continue to rise.
Homeowners: For those in a home and intent on
staying there, refinancing their current mortgage would make less sense
if rates continue to escalate, Nunziata said.
The number of refinanced mortgages grew significantly in 2011-12,
with home-purchase loans becoming a smaller part of the overall mortgage
mix, he said. The last time the refinance market experienced a big
boost, he noted, was back in 2001-03, when rates dropped to 5.25 percent
from 7.25 percent.
Mortgage lenders who have been specializing in refis are likely to go
out of business “sooner than later” if interest rates keep rising, he
“The lenders that focus on purchase business will be in good shape, as long as the economy continues to improve,” Nunziata said.
Author:Ivy Beller Phone: 702-526-2298 Dated: July 15th 2013 Views: 915 About Ivy: Over 17 years experience in residential sales, land, multifamily and commercial. Director of sales ...
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