Interest Rate Hike Looming For Buyers
February 10th, 2010 | categories: Buying Real Estate in Coconut Grove
There are mixed messages out there about when and if interest rates are going to go up. If the FED exits the market as planned on March 31st then interest rates are expected to rise. By how much? HSH Associates and Moody’s believe rates could rise to 6%. Morgan Stanley has stated anywhere between 7.5 to 8.5%.
Today the Federal Chairman Bernanke said that the timing of the exit would depend on economic conditions. He stated “at present the U.S. economy continues to require the support” of ultra-low interest rate policy”.
It seems that nobody has a definitive answer as to when and by how much interest rates will rise. But keep in mind that the cost to you of interest rates rising by 1% is equivalent to the home price falling by 10%.
Some buyers who are waiting out the market may hurt themselves in the end by being hit with a large rate hike. Historically when interest rates have gone up they have gone up fast. It is not uncommon for there to be a 1% hike in a matter of months.
If a mortgage rate increase of 1% is the equivalent of a 10% increase in prices, absent an increase in wages, will home prices not decline ~10% for each 1% increase in mortgage rates?
Another way of saying the same thing: If it costs my buyer 10% more to buy my home from me (at the price I paid), won’t my price need to decline to accommodate their ability to pay?
Snowball
First, I enjoy reading your blog; it is very interesting and contains a lot of useful information. However, my comment to this blog and, specifically, the sentence of a 1% interest rate increase being equivalent to a home price falling by 10%, is misleading and, worse, implies that current people searching for a house better hurry up and buy a house as soon as possible based on incomplete information. A 1% interest rate increase is not equivalent to a 10% decline in home value because home buyers can buy down the interest with points.
Example: today’s interest rate for a 30 yr fixed jumbo loan with Schwab (see their website) with 0 points is 6.873%. With 1.0 point it is 6.54%: 0.33% less. If a house price is $1.0 million and the mortgage amount $800,000, the home buyer can get a 0.33% interest rate reduction for $8,000. So the $1.0 million house price only has to fall by $8,000, or 0.8% to ‘reverse’ a 0.33% interest rate rise. To take the numbers in your blog: a 1% interest rate increase would be more equivalent to a 2.4% price drop for this $1.0 mil house….much less than 10%. Moreover, the $8,000 paid for the point is tax deductible which further reduces the necessary drop in price to make up for a 1% interest rate hike.
I know your blog is not about personal finance but if you mention these kinds of numbers I hope that you can publish a follow-up mentioning the info above or at least the possibility for a home buyer to neutralize some of the anticipated interest rate increases with buying points.
Thanks and regards
Cary, I think you make some good points. Thanks for the comment.
Keep in mind everyone, that the quote of a “1% increase in interest rates being equivalent to a 10% decline in the home price” was taken directly from the Wall Street Journal.