The 30-year fixed-rate mortgage—the most popular loan for home buyers—is inching closer to the 5 percent range. The rise in mortgage rates coincides with years of home price increases. Could this erode affordability more and cause would-be buyers to sideline themselves from the housing market?
The Mortgage Bankers Association reports mortgage rates have surged to 4.97 percent. When including fees, most 30-year borrowing costs have already reached 5 percent or higher. The higher mortgage rate translates to about $35,000 more on interest on a $220,000 loan over 30 years, Reuters reports.
“Higher interest rates is a headwind for housing, but it’s not a major obstacle right now,” Ward McCarthy, chief economist at Jefferies & Co. in New York, told Reuters.
But some economists are seeing it as eroding housing affordability. “The rise in mortgage rates this summer to their highest level in seven years has made it more difficult for potential buyers to afford a home,” Frank Nothaft, chief economist for CoreLogic, said in a statement about a new report from CoreLogic that showed a rise in home prices continues in several markets.
Last week, the Federal Reserve voted to raise its key interest rate. It also strongly hinted that several more rates are ahead. While mortgage rates aren’t directly tied to the Fed’s benchmark rate, they are often influenced by them.
Following the Fed’s move, National Association of REALTORS®’ Chief Economist Lawrence Yun declared the “era of super-low mortgage rates is over.” But he was quick to note that the Fed’s move was occurring because of an improving economy. “Therefore, home sales should hold steady as the opposing forces of higher rates and more jobs neutralize each other,” Yun said in a statement. “[But] home price growth will surely slow as higher interest rates limit the stretching of the home buyers’ budget.”
The rising rates may push some consumers to buy sooner rather than later.
“Affordability at least currently is average in this period of time,” McCarthy told Reuters. “The rise in mortgage rates has encouraged some people to move into the market now.”