The likelihood of higher mortgage rates is the topic of this month’s Question and Answer session between Lane Hornung, CEO of 8z Real Estate andJohn Rebchook of Denver Real Estate Watch. This is part of 8z’s Real Estate 101 series.
John: Lane, it seems like we have been talking about the potential of rising rates forever.
Lane: I will start by saying that I have been one of those saying for years that interest rates have no place to go but up. Most major economists agreed with me. But rates have remained stubbornly low for years, which is a great thing.
John: Now, it seems more likely than ever that rates will rise. What do you think that will mean for the housing market?
Lane: When the Fed raises its rate, the interest rate on 10-year U.S. Treasury bonds will rise and ultimately mortgage rates will rise. So, yes, mortgage rates probably will rise. Still, for most buyers, I think it is going to be fairly inconsequential.
That is not to say it will not have any impact. A rule of thumb is that a half point increase is essentially the same as a 5 percent adjustment in price.
In other words, if you want to pay the same per month, if rates rise a half percent, the price of the home you want to buy needs to come down 5 percent.
So, on an individual basis, that will have an impact. Some people will have to buy a less expensive home. But, as far as the overall market, I don’t think it is going to have an appreciable impact.
John: For a company like 8z, which sells homes along the Front Range and in Northern California and Southern California, it seems the impact of a slight increase in rates would be even more muted.
Lane: In areas where you have strong demand, a strong economy and a low inventory of homes, you could end up with higher interest rates and higher prices.
If interest rates rise, it is also possible home prices will be more moderate, 4 percent or 5 percent, instead of the double-digit increase some of these hot markets have been experiencing.
And instead of a 2-month supply of unsold homes we might have a 3 or 4-month supply. Frankly, this would be welcome news for many people in the industry, who are worried about affordability.
John: And Lane, could an increase in rates spur an increase in buying activity?
Lane: I think it could convince some people to get off the fence. It’s been like the little boy who cried wolf. Now, people will see that the wolf, that is rising interest rates, is real. They will want to lock in rates before they go up even more.
And let’s face it. By any historical measuring stick, rates have been extraordinarily low for a long time. Even with a small bump in rates, they will still be low by historical standards.