If you’re thinking of buying a new home, now may be the best time to do it. In the last week of August, interest rates dropped to 4.1%, the lowest for the year and far below historic levels. While rates around 4% may not break any records, they’re not far from it. It’s helping to ease the pain of home prices that have climbed by one-third in Southern California over the last two years.
Unfortunately, many experts believe the days of low interest rates may soon be over, a change which may cripple the market and stop the recovery in its tracks. Low rates have propped up the housing market for years now. But with the Federal Reserve ending its so-called “quantitative easing” program to lower rates and the economy gradually strengthening, many market watchers are predicting rates will start to rise again soon. This time next year, the Mortgage Bankers Assn. projects, the average interest rate on a 30-year fixed-rate mortgage will be 5.2%, its highest level since early 2010.
At today’s 4.1% rate, the monthly payment on a 30-year fixed-rate mortgage with 20% down at Los Angeles County’s median price of $457,500 would be $1,768, according to Bankrate.com’s mortgage calculator. Add a point and the monthly payment climbs to $2,009.
That extra $241 a month is no small thing for a housing market that’s already struggling with affordability issues, said Leslie Appleton-Young, chief economist at the California Assn. of Realtors.
“It’s going to worsen affordability,” she said. “All else remaining the same, higher rates are going to make it more difficult for people to get into housing.”
And coming after years of low rates — when many homeowners either bought a house with a relatively cheap mortgage or refinanced into one — rate hikes could also squeeze supply, which is already fairly tight by historical standards.
Roughly half of the nation’s 50 million home mortgages have interest rates at or below the current rates, said Mark Fleming, chief economist at real estate data firm CoreLogic. So if rates go up, buying anew would mean a more costly mortgage.
“That means you don’t have a lot of incentive to sell your home,” he said. “That could lead to a lack of supply going forward.”
Do you think interest rates will rise to 5.2% by next year? What impact will this make on the market?
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