With all the bad news surrounding interest rate increases lately (which is not exactly true, by the way), it’s no wonder buyers are sitting on the fences again. But what’s really going on? And more importantly, what should buyers who want (or need) to buy now, do?
First, let’s discuss what’s really going on:
Two days ago I reported that the Freddie Mac weekly Primary Mortgage Market Survey (PMMS) from last week got it wrong because their survey did not contain Friday’s MBS gains, which actually caused a reduction in the average 30-yr fixed rate mortgage (FRM), rather than the 0.18% increase they reported. Thankfully the national media is on the ball, as usual, and today (that’s two days later for those of you keeping score) the media reported that interest rates are near two-week lows, rather than the two-year highs they just reported on Monday.
It’s not their fault, you say? They just report what they’re told? While that might be true, their inaccuracy in reporting has caused many potential home buyers to sit out the late-summer selling season – a big mistake in the fastest growing housing market on record (yes, faster than the boom of 2004-07). Meanwhile, home prices continue to increase at a double-digit pace. In some major markets, home prices were up by nearly 25%, according to this week’s Case-Shiller report.
Which leads us to the second question:
What should buyers who want (or need) to buy now, do? For the past two years, buyers have had the luxury of overpaying for a house because interest rates were below 4.00% – this allowed them to qualify for the payments on a higher balance loan. Now, with rates at a blistering (sarcasm intended) 4.50%, I hear Realtors telling buyers that their buying power has been reduced by about $50,000 – that’s about a 10% decrease, on average, since home prices in the B.A. average $521k, according to a recent report by the California Association of Realtors.
Let’s look at the other side of the coin though.
The Principal and Interest payment for an 80% loan-to-value mortgage on an average home of $521k, assuming last year’s interest rate of 3.875% would be around $1,960 per month. With the current rate around 4.50%, that payment would be around $2,110 – a difference of $150 per month, or $1,800 per year. As it turns out, that really is a reduction in buying power of about $54k; however, the income required to qualify for this new, higher interest rate is only about $400 per month higher than it would be for the lower rate.
As a lender, if a buyer’s ratios are so tight that s/he cannot tolerate a $150 per month payment increase on a $417k loan, I’d be hesitant to approve the file in the first place. However, we are required by law to submit and/or approve all eligible borrowers, so if someone insists on pushing the limits, s/he is likely tolerant of higher-risk situations, and it would therefore be appropriate to recommend an adjustable rate mortgage (ARM), rather a FRM. Today’s ARM rates are all still below 4.00%, so the borrowing power argument becomes moot.
Realtors, get your buyers up to speed on what’s really going on in the market. If you don’t know, or if your lender doesn’t (really) know, find a better source of information. Buyers, ask questions – lots of questions. If your lender isn’t telling you all of this stuff, find a better lender.
For buyers and Realtors alike I say, if you’d just like to get a second opinion about what you’re being fed by the “experts” you’re working with, give me a call.