Buyers Market Ending? | Chris Doering Exclusive Interview

Throughout 2014, we've seen mortgage rates stay and have a cup of coffee around the low 4% range.  However, with the fed looking to raise mortgage rates in the near future, your cost to borrow funds for home purchases may be in jeopardy of rising.

A majority of economists have come to the consensus that the average 30-year fixed-rate mortgage could reach 5% by mid-2015, The New York Times reports. On Friday, Freddie Mac reported the 30-year fixed-rate mortgage averaging 4.2 %. This is largely attributable to the Federal Reserve’s plan to withdraw from buying mortgage-backed securities. 

Economists suggest that while a 5% mortgage rate is still historically low, such an increase still has the potential of reducing buying power in a home purchase. For example: According to some estimates, a 1 percent increase in interest rates can raise a monthly mortgage payment on a typical home by more than $700 in pricier parts of the country. Of course that type of increase is very loosely applicable to the Gainesville market. 

But even in the case of rate hikes up to 7%, the analysis found that homes remain affordable overall. From 1985 to 2000, home owners’ housing costs—including the principal and interest on a median-priced home—accounted for 22% of a home owners’ median household income. However, for comparison, today’s households are spending about 15 % of their median income on a median-priced home.

For further details, check out this recent article from the NY Times:

When Mortgage Rates Rise

Mortgage rates have remained relatively low this year, and little changed, despite previous predictions of an inevitable rise. Borrowers, though, may be wondering how much longer this environment can last.

At this point, waiting for the rise in interest rates “is a little bit like ‘Waiting for Godot,’ ” said Stan Humphries, the chief economist for Zillow, an online real estate information service, referring jokingly to the Samuel Beckett play named for a character who never shows up. 

Mr. Humphries and other economists are now predicting that the average 30-year fixed-rate mortgage will hit 5 percent by the middle of next year, partly as a result of the Federal Reserve’s planned withdrawal from buying mortgage-backed securities. Last week, the 30-year national average was 4.28 percent, according to HSH.com, a publisher of loan information.

While 5 percent is still low by historical standards, an increase of that size can reduce buying power more than borrowers may think. According to Zillow, a 1 percent rise in interest rates could raise monthly mortgage payments on a typical home next year by more than $700 in pricier parts of the country. Zillow compared the effect of a rate increase to 5.1 percent from 4.1 percent for a 30-year mortgage in 35 metropolitan areas. Figuring in the expected increases in home values over the next year, Zillow found that monthly payments would rise by as little as $65 in the St. Louis area and as much as $710 in the San Jose/Silicon Valley region.

In the New York metropolitan area, which includes Northern New Jersey,Long Island and Westchester, monthly payments would rise by about $200.

While a rise in rates of even 50 basis points can have a substantial effect on demand, Mr. Humphries noted that for the country as a whole, homes are still relatively affordable. From 1985 to 2000, paying the principal and interest on a median-priced home ate up about 22 percent of median household income, he said. Now, people are spending about 15 percent of median income for the median-priced home.

“So even when rates go to 7 percent, it will still be affordable” in most areas, Mr. Humphries said.

Los Angeles and the Bay Area are glaring exceptions, as home prices there are demanding 40 percent of household income.

A lack of inventory in mid- to lower-priced homes may pose more of a problem for first-time buyers. Research by Redfin, a national real estate brokerage, shows a sharp decline in home listings below $375,000 compared with 2011.

Looking at properties listed in July, Redfin found 28 percent fewer homes priced under $375,000 than in July 2011, and 50 percent fewer priced at $130,000 or less. Above $375,000, inventory was up by 16 percent.

In August, the number of listings over all declined by an unseasonably high 9 percent compared with July, signaling that it is unlikely “we are going to see a big push in affordable inventory anytime soon,” said Nela Richardson, Redfin’s chief economist.

On the plus side for buyers, the market could become less competitive. The National Association of Realtors reported on Monday that purchases by investors and all-cash buyers fell sharply in August.

“Many markets are not going to see the same multiple-bid environment that we saw even earlier this year,” Ms. Richardson said. “It will be easier to win the home of your dreams than it was a few months ago.”

First-time buyers need not feel rushed, she said, noting that low rates are likely to stay low “for a few more months. It’s O.K. to be patient and to look.”

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