So, we’ve had a good run – actually, a spectacular run – especially for those of us who already own homes. Lowest mortgage interest rates in history, soaring housing prices, quick sales – what could go wrong?
Don’t look over your shoulder, but the mortgage interest rate monster is right behind you, getting bigger and bigger, fed by your friendly Federal Reserve. Mortgage rates are closely tied to the 10-Year U.S. Treasury note, which is influenced by inflation, the job market and a variety of other business-connected phenomena. The Federal Reserve announced at the end of last year that they expected to raise interest rates multiple times during this year and we’re just starting to see the effects of that. Rates are up and the stock market is down with a lot of nervous investors out there.
During the first week of January, U.S. mortgage rates rose to their highest level since May 2020, according to Freddie Mac. The average rate for a 30-year loan was 3.22% this week, up from 3.11% the previous week, and you can anticipate further increases. A year ago, the mortgage rates were 2.65%. Naturally, this increases the costs associated with buying a home at a time when home sale prices are near record levels. In spite of this, there is still strong buyer demand for homes and very low inventory rates.
However, there will be a negative impact on some buyers who will start to have problems qualifying for a mortgage at higher rates. For example, a 3.22% rate on a $300,000 loan would be a monthly payment of $1,300, excluding taxes and insurance. At last year’s rate of 2.65%, the monthly payment would be $1,209, excluding taxes and insurance. It’s not big, but enough to cause a problem for a marginal buyer and especially first-time buyers who would have to come up with more cash down so the amount of the loan could be reduced in order to qualify.
Just to give you a little perspective of how historically low the mortgage rates were last year, I checked on Freddie Mac’s website, which has a full analysis of interest rates starting in 1971 when the average rate was 7.31%. The highest rate was in 1981 where the average for the year was a shocking 16.63%. Hard to believe even for those of us who actually remember but especially for young first-time buyers now who are shocked at the relatively small recent increase. The lowest rate was, of course in 2021, which was an average of 2.96%.
The years between 1979 and 1990 all had double-digit interest rates. By the time I had a real estate license, the rates were over 10%, but by then, everyone just assumed it was the new normal. From 1991 to now, the rates never hit double-digit again and went progressively down pretty much every year right through to 2021.
My advice is not to get rattled. It would be foolish to assume that rates going up are going to totally crash the real estate market and to also assume that homeowners aren’t going to sell because they have to pay a higher rate for a new mortgage. Yes, some homeowners will use that as an excuse not to move or determine they can’t afford the increase, but for the most part, everyone will get accustomed to the increase. Even a full point over last year’s low would bring the rate to about 4%, which puts us where we were less than 5 years ago when homes were selling for a lot less.
Hang on, there has been nothing during the last two years that has been easy, but the interest rate monster may not be as scary as we think.
