Rising Mortgage Rates Likely to Slow Home Price Increases

  • June 07, 2018

After several years of near-zero interest rates, the Federal Reserve has started to gradually raise rates.  As mortgage rates continue to rise, home buyers will likely see relief in terms of home price appreciation.  In busy metros like Seattle, Las Vegas, and San Francisco posting double-digit annual gains this reprieve will be especially welcome.  In fact, some housing experts attribute the past few years’ rapid home price appreciation to exceptionally low mortgage rates.

Most households have a limited budget for housing costs and cannot exceed this budget.  Thus, continued home price appreciation with rising mortgage rates is not sustainable.  Home buyers will still have to be able to afford housing. 

Business Insider contributor Wolf Richter examined the impact of rising mortgage rates and affordability and mapped the results into three scenarios based on typical household budget restriction around the country.  For the sake of comparison, the following scenarios exclude down payment variations. 

 

Scenario One: Household budget for mortgage payment is $1,200 a month. With a 30-year fixed rate mortgage:

 

Interest Rate

Total Housing Budget

3.5%

$267,000

4.8%

$227,000

6%

$200,000

 

Scenario Two: Household budget for mortgage payment is $3,500 a month. With a 30-year fixed rate mortgage:

 

Interest Rate

Total Housing Budget

3.5%

$779,000

4.8%

$662,000

6%

$584,000

 

Scenario Three: Household budget for mortgage payment is $6,000 a month. With a 30-year fixed rate mortgage:

 

Interest Rate

Total Housing Budget

3.5%

$1.336 Million

4.8%

$1.136 Million

6%

$1.0 Million

 

Although average mortgage rates are still historically low, further rate hikes are likely to continue as the economy continues to strengthen.  The demand for mortgage financing is still strong, especially with some buyers looking to lock interest rates before further rate hikes.  This competitive housing market makes mortgage preapproval even more valuable for prospective home buyers.  Going into the home buying process with preapproval shows sellers you have already started the financing process and are serious about buying their home. 

 

Sources: Business Insider

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