Rate rise modestly impacts home affordability

The Scotsman Guide - Victor Whitman - 12 January 2017

The recent rapid rise in mortgage rates has had only a slight effect on the monthly cost of mortgages in most counties, but homebuyers in high-cost cities will feel some pain.

Averaged out on a national basis, homebuyers saw a $75 monthly increase in mortgage payments after the post-election rise in mortgage rates through December, the National Association of Realtors (NAR) reported. In high-cost cities like San Francisco, however, buyers will pay an extra $375 a month, NAR said. In the lowest-cost area, Cochrane County, Texas, buyers will pay only an extra $13 a month on average.

“In most areas, it is pretty manageable,” said Danielle Hale, NAR’s director of housing statistics. “Obviously, in some areas, where home prices are already very high, the change in monthly payments is more affected by the rise in mortgage rates.”

The 30-year fixed rate rose to 4.2 percent in December, up roughly 70 basis points from November’s pre-election level. Hale told Scotsman Guide News that rates will have to rise beyond 6 percent before severely hampering home affordability.

“From anationwide perspective, if you look at our affordability index, we are still at a pretty good affordability situation,” Hale said. “For the last five years or so, homes are more affordable now than they have been before, across the U.S. as a whole.”  

NAR is forecasting that rates will not reach 5 percent until late 2018. If rates rise from 4.2 percent to 5 percent, it would add another $90 to the monthly mortgage payment for a buyer, or an extra $450 in high-cost cities. Hale said rising rates will only affect new homebuyers, and people with adjustable-rate mortgages.

Mortgage rates have fallen over the past two weeks, after rising consistently in the wake of President-elect Donald Trump’s surprise victory. Through Wednesday, the 30-year fixed rate averaged 4.12 percent, down 8 basis points, Freddie Mac reported. A year ago, the rate averaged 3.92 percent. 

“It is conceivable that we will see close to 5 percent by the end of 2018, but probably not much higher,” Hale said. “A lot will depend on overall economy, fiscal policy, how the [Federal Reserve] decides to react. There are a lot of potential moving factors.”