The key take aways I had were: First, that interest rates are STILL very low by historical standards and that if you are on the fence you should act sooner rather than later because they are likely to only go up from here. Second, home prices are a bigger motivator to potential buyers than the low interest rates so if you are looking to sell, don’t be scared away by the recent rate jump we just had. And lastly, despite lower income levels following the recession, home affordability in Phoenix today is still drastically better today than in 2006 – the average Phoenix home owner is spending about 18% of their annual income on their mortgage while in 2006 that number was 33%.
Last week the nation learned that the days of ridiculously low interest rates may soon be reaching the end of their rope — and in some ways already have.
With the recent comeback in buyer demand, rebounding home prices and an easing jobless rate, Federal Reserve Chairman Ben Bernanke disclosed that the time for nation’s central bank to start pulling back the reigns on its massive $85 billion-per-month bond-buying program is nearing, and possibly end next year. The idea behind the program was to stimulate the economy by buying bonds in the open market in order to depress interest rates.
No one expected these artificially low rates to last forever, and they had already been rising in the weeks leading up to Bernanke’s announcement.
Rates were still hovering at record lows of about 3.5 percent in early May, only to cross the 4 percent threshold a few weeks later for the first time in more than a year. Today, the national average for a 30-year fixed mortgage reached 4.58 percent, according to Bankrate.com, which, in the grand scheme of things, is still well below historical norms.
While upward movement has always been inevitable, last week’s news rattled the real estate industry, which has mixed feelings about whether the market is ready for the change and the impact it will have.
Some experts say higher interest — coupled with rapid home appreciation — will uproot the affordability that has recently been luring buyers back to the housing market in droves.
“At some point, with both increasing, consumers will find themselves in a position where they notice homes are more expensive than what they’re used to,” and potentially priced out of the market, said Svenja Gudell, a senior economist at Seattle-based Zillow Inc.
Let’s suppose a consumer obtains a 30-year fixed loan and puts 20 percent down on a house priced at $170,500, which, according to Zillow, is the current median home price for metro Phoenix (less than Arizona State University’s estimate of $181,399 for April).
If they were lucky enough to catch a 3.5 percent interest rate while it was still around, the monthly mortgage payment would come to $612.50. But at 6 percent, which is closer to historical norms, that monthly bill would jump by more than $200.
Other experts, however, say today’s rates aren’t sustainable long term and an increase, so long as it’s gradual, should have a minimal impact. They also say it will allow private-sector investors to reclaim the mortgage market.
Concerns that demand will suddenly surge from buyers trying to snag low rates while they still can, only to drop off when rates climb past a certain point, are also unrealistic, said Charlie Walters, owner of Chandler-based Walters Realty Group.
Home prices, not interest rates, have been the biggest motivation for buyers this past year, he said. And right now, buyers’ biggest concern is locking something down before prices get too high, which has been exceptionally challenging due to the relentless shortage of homes for sale.
“I don’t think (higher interest will) have a dramatic impact on the purchase market,” Walters said. “People may qualify for less than they would have before, but the demand is still there.”
While Gudell agrees a sudden surge in demand is unlikely, her primary concern is that household income won’t keep pace.
During the recession, incomes plunged right alongside falling home prices. But this past year, prices nationwide have been seeing rapid appreciation, especially in Phoenix where they were up nearly 30 percent year-over-year in April, according to the latest ASU data.
Median household income, on the other hand, has remained relatively stagnant at 2008 levels.
That’s where low interest rates had been playing such a huge hand, giving consumers more purchasing power for homes they might not have otherwise been able to afford, she said.
But with interest rates now clipping right along with home prices, and if incomes fall too far behind, Gudell said housing affordability will decline and demand will thus follow.
“Home values will have to either remain stagnant, while incomes catch up, or — the more likely scenario — home values will decrease,” Gudell said in a blog she wrote in April on the topic.
She is also concerned that buyers will end up having to spend bigger chunks of their income on their mortgage payments, which was a huge reason why homeowners who had overextended themselves lost their homes during the bust.
During the market’s peak in mid 2006, when rates were around 6.7 percent, Gudell said the average Phoenix homeowner was spending 33.6 percent of their annual incomes on mortgage payments.
Today, that figure has dipped slightly below historical norms to about 18 percent, but could be on the rise again given the changing market conditions, she said.