by Scot Campbell, Managing Broker, Coldwell Banker – Campbell Realtors 8/1/2013
As a potential home buyer, you already understand how interest rates will affect your monthly payment. As you read this, I can almost feel your pain as you think about either how much less you can afford now that rates have increased about one full percentage point. Or, possibly you are thinking how much more you must pay now as compared to May 2013 IF you had been able to close on a house back then.
Interest rates are still very low by historical standards and the rates will go higher in the future (when the Federal Reserve stops buying mortgage backed securities in an effort to stimulate the economy). What to do? You would be wise to buy a home before rates go up any further. To keep your afforability higher and/or your payment lower, many buyers are locking into 5-Year Fixed Loans which convert to an adjustable mortage at the end of five years. Of course, this is zero risk for a buyer who absolutely knows they will be selling in 5 years or less. Other buyers who intend to hold longer are selecting either 7/1 or 10/1 fixed rate loans. These options will improve affordability and lower mortgage expense.
There is a bit of an upside to these higher interest rates, and that is “inventory”. Ever since the mortgage rates started going up, the inventory of available homes has started increasing in the overall Orange County market. You should have more choices, and there will be fewer buyers bidding against you should you find a particularly nice home to purchase. So, yes, the higher rates are painful, but there is more opportunity for you now and when you are looking to purchase a home for the long run, nothing is more important than buying the right home. I hope this eases your pain… at least a little bit.
For extra motivation to buy a home before interest rates increase any further, simply look at the column in the below table for the amount of the loan you can afford with 6% Vs. 5%… as you can see it will only get worse.
Higher interest rates means fewer buyers can afford to purchase your home… Period. You are not in as strong of a position as you were in early May 2013, it is just that simple. If you want to know how much less the buyers can afford than before, take a look at the below table which was prepared by Bank of America.
For example, let’s assume a buyer has $4,000 per month available to apply toward a mortgage:
On May 1st, a buyer with $4,000 per month to apply toward a 4% Fixed Rate Mortgage could secure a loan with a principle balance of $837,845.
After interest rates jumped to 5%, a buyer with $4,000 to apply toward a mortgage can only secure a mortgage loan with a principle balance of $745,127.
The effective buying power of the homebuyer has been reduced by approximately 11%. There is no question that the rise in mortgage rates has reduced the effective demand for homes in our market area. A relative few buyers locked in an exceptionally low interest rate and monthly payment… And, an equal number of home sellers were able to get a price much higher this spring at least partially as a result of the record low mortgage rates.
At this point, I say “good for them”, but the rest of the buyers and sellers in the market place will need to make decisions based on where the market is today… and where it is likely to go in the future. Mortgage rates will go up as the Federal Reserve begins to scale back its policy of Quantitative Easing. As we recently saw, interest rates can jump a full percentage point in a matter of a few weeks.
I believe the current interest rates represent a very good opportunity for buyers to lock in a low rate by historical standards, and the opportunity for home owners to sell at a price which is much more attractive than we saw two years ago.
Should home sellers expect to get MORE than what a home sold for this spring? It might happen, but the conditions for that occurrence are not nearly as strong as they were back in May 2013. I would recommend that home owners spend more time reviewing the sales comparables with a Realtor who really understands the market, and then carefully select a price which will be enticing to buyers… which is probably about the sale price of the last similar home sold in the neighborhood.
For questions about buying and selling real estate in Huntington Beach and Coastal Orange County, contact Scot Campbell.
He has been a licensed broker for over 22 years and has brokered over 1000 homes and just about every type of transaction imaginable.
Read his profile and client reviews at www.ScotCampbell.com
He can be reached at 714-960-0700 at the office, 714-336-0394 on his mobile number or via email at Scot.Campbell@ColdwellBanker.com