After almost seven years of historically low interest rates, the Federal Reserve has incrementally increased rates numerous times during 2018. It is predicted that these rate upticks will continue into the coming year, impacting homebuyers looking to purchase residential real estate in Santa Cruz County, Silicon Valley and beyond.
Overall, rates are still extremely low (the last time a 30 year fixed mortgage was at the current 4.83% was April of 2011) but regardless, every partial percentage mortgage rate increase hits a homebuyer’s bottom-line. Interest rates have been squarely in the three percent range since December 2014. Rates then went up into the four percent range from June 2013 through November 2014 but again, as a whole, remained quite low. And, even with the increases over the past year, mortgage interest still hasn’t gotten anywhere near the astronomical levels of the 1980s when they volleyed between ten percent and eighteen percent.
For the majority of people, the determining factor of “How much house they can afford” is their monthly mortgage payment. And, as mortgage rates increase, their purchasing power decreases. As the graph below illustrates, a family who can afford a maximum of $9,500 per month for a mortgage, is able to purchase a home worth $1,750,000 if the interest rate is 4.75%. Their resulting monthly payment is $9,128, well within their budgeted $9,500. But as interest creeps upward, so does their monthly mortgage payment while the price of the homes they can afford declines. If rates hit 6.25%, this same family must now look for residences in the $1,600,000 range, which also pushes them to their maximum monthly payment threshold.
Graph courtesy of Nikki James from OPES Advisors in Palo Alto
As rates continue to tick higher, the loan amounts buyers could once afford decline. A higher rates also results in buyers paying more over time for their property (they buy a house for less but pay more overtime thanks to increased interest).
As mortgage rates increase, buyers have a choice to make:
- Act quickly before rates continue to climb
- Look for houses in a lower price range
- Step back from their property search to save more toward a down payment (a challenge of late due to the topsy turvy stock market)
- Wait until they have an increase in income
The bottom line is, mortgage rates are still at incredibly low rates but are expected to continue their ascent in 2019 and possibly beyond. According to a recent MarketWatch article, the Fed “made clear in their November meeting that they intend to raise interest rates in December and that gradual rate hikes remain appropriate.”
The Dawn Thomas Team is a specialized group of client-service focused professionals whose skills contribute to the overall real estate experience for our clients in the Silicon Valley and Santa Cruz County beach communities. Dawn and her expert team are available to answer your questions regarding financing options and all things related to your upcoming real estate transaction.