Higher Mortgage Rates Loom over Orinda
We knew it would happen some day: mortgage rates have inched up.
According to Freddie Mac, the average 30-year mortgage rate climbed steadily from an all-time low of 2.68% in December 2020 to 3.45% in January of this year.
While these are still historically low rates, it has made potential buyers and sellers wonder what may be in store for the housing market if rates continue to rise. The knee-jerk response to that query is higher rates have a downward impact on prices because potential buyers can’t afford to borrow as much.
For example, let’s say a buyer can afford a $5,000 monthly payment. When interest rates were 2.68% this buyer could have borrowed about $1.25 million. But if interest rates rise to 4.5% then they can only borrow about $1 million for the same $5,000 monthly payment.
All of this is not to say that home prices will or will not fall, just that rising interest rates are a headwind for future price appreciation.
It’s easy for market participants to get fixated on the downward pressure to demand, even though buyers in the example above pay the same amount over the life of their mortgage in both scenarios.
The forces of interest rates and prices have offsetting financial implications for buyers that use traditional financing. Said another way, buyers don’t need to stress about whatever estimated value Zillow may show next year if buying a home to live in for a long time.
Potential sellers – especially those considering reducing their overall real estate holdings – are one group that might benefit from avoiding any disappointing future prices. The future of both interest rates and home prices is far from a foregone conclusion, and prospective sellers often resist the idea of selling after large price gains anyway in a phenomenon known as recency bias.
Buyers and sellers should both recognize that interest rates are only one force impacting real estate prices. Other forces, such as local company IPOs, the economy and tax policy can be just as hard to forecast as interest rates.
Better for home buyers and sellers to focus on the nuances of their unique finances, lifestyle and risk tolerance to guide them.
David Born can be reached at dborn@pfmpartner.com.
