I would like to start off this article by stating that I am not an economist. While it is impossible to determine the exact affect of interest rates on the housing market (due to the multitude of factors) they do have a strong relationship. How much interest you pay on a home largely dictates what home you can actually afford. Interests rates are set by the Federal Reserve and they determine the rate at which money is lent to banks and financial institutions. Currently in Lemon Grove, interests rates on a 30 year fixed conforming loan range from 3.5% to 4.125% depending on several factors (which have not been that low since the 1950s)!
After the housing crisis in 2007 the Federal Reserve lowered interest rates in an effort to stabilized the housing market. Values were depreciating fast. Interest rates were low. Values continued to decrease. Until values matched what the market would bear in a new prove everything environment. Artificial incomes spurned by careless business created the bubble that normal business took years to fix.
That bubble stabilized in 2012, however interest rates continued a downward trend pressured by an under-achieving US market. Finally, home values reacted as they should when money is cheaper. Values have been going up.
Greater Home Loans looks at the how interest can affect what home you can afford:
You are looking to purchase a home in the San Diego area. The average home in Lemon Grove costs around $400,000 and at an interest rate of 3.75% you would pay $1,852.46 per month for your principal and interest payment (plus taxes and insurance and zero down payment – let’s live in this world for simplicity). But let’s say that suddenly the Fed decides that inflation is rampant (suddenly) and curbs it by increasing interest rates to 8%. For that same $400,000 dollar house you are paying $2,935.06 per month due to the interest rate, that is an increase of $1,082.60. If you only had $1852.46 as money available for the mortgage, you would definitely need to shop for a cheaper home. In fact, at 8% that $1852.46 payment would give you a home valued at $252,460.00.
What will happen to the housing market in that environment? Another bubble? Essentially, you are paying more for a house that you would have previously payed much less for.
The dance between interest rates and home values is tricky. How the fed handles it really shows their confidence in our economy. After all, the one thing that can handle paying more for a mortgage is earning more from you job. Interest rates go up, earnings go up, values react accordingly = no bubble. So where are we?
What you should consider:
Because interest rates are so low at this time, while you may not want to get into buying a house, it would be a wise to to refinance your mortgage before rates go back up again.
High interest rates not only affects housing costs but they also affect how the bank responds. When interest rates rise less capital is available so banks tend to lend out less. With banks lending less money, not as many people are able to purchase the house that they want.
Because interest rates have dropped to such low levels it is expected that they will once again rise. But don’t freight, that does not mean they rise 10% in the next month but it will rather be a slow process. This eventual increase in interest rates should be an important factor in your home buying process.
Interest rates play a key role in what house you can afford and if you can even afford a house at all. Make sure if you are going into a mortgage and it is an adjusted rate mortgage that you are looking at the mortgage rate caps, because interest rates will not always be this low!