Higher Interest Rates – Who Cares?
I have always maintained that buying a home is only one of the “life puzzle”. But recent announcements by the US Federal Reserve Bank caused a quick spike in mortgage interest rates of about 1%, so the 30-year fixed mortgage rate jumped from about 3.5% to 4.5% overnight. This event may signal the beginning of a trend to a period of rising interest rates that may lower housing affordability indices in the months and years to come.
So, who cares? The following analysis is intuitive, and based on logic and my own experience in the Charleston, SC real estate market, as no formal research has been done.
Local, First-Time Home Buyers: These potential buyers were just recovering from the recent tightening of FHA, Fannie and Freddy qualifying rules, and increased mortgage insurance rates. Higher interest rates mean they will only qualify for lower loan amounts. If they really want to stop being renters, first-time home buyers may have to settle for lower-priced homes, just to be able to “get their foot in the market”. Many buyers who are currently under contract for new construction homes but did not “lock” their interest rates before the rate hike will see their monthly payment increase, sometimes beyond their “comfort zone”.
Local, Move-Up Buyers: This is the market segment that could be affected the most. Rising home prices AND higher interest rates mean that they may have to pay a higher interest rate for their new home than the rate they are paying now (many were able to refinance), making the move-up change a “double whammy” combination of a higher price point AND a higher interest rate!
Out-of-town Relocations: These are buyers who are relocating to the Charleston, SC area because of work or personal reasons. While they may see an increase in their monthly housing budget, presumably they are also getting a better salary or a lower cost of living to compensate for this, and they may see the potential equity growth as prices rise, so they may still decide to buy, regardless of interest rates.
Retirees/Second Home Buyers: I don’t see a significant effect of rising interest rates on this market segment. As the baby boomers reach retirement age, many will still want to retire in a warmer, gentler place. These folks may have good equity in their existing homes, so many will buy their retirement home with cash or may need lower loan-to-value loans. The only question is their eligibility for a mortgage payment when they are on a fixed income retirement. A reverse mortgage may solve the issue for these buyers.
Other Buyers: Every case is different so it is almost impossible to predict a specific trend for this “general” pool of buyers. In any market, there are people who get married, have kids, get divorced or have other life-changing situations that may entice them to buy or sell homes. These buyers may be affected in terms of home affordability and eligibility for a loan, but will still decide to buy a home if this is within their means and plans.