New Home Buyers may have jus missed the Boat!
The era of record-low mortgage rates is over.
Just over the past week, the national average for a 30-year loan jumped from about 5 percent to more than 5.3 percent.
Locally, the rate hit a 52-week low at 4.94 percent two weeks ago. That's the lowest rate since local records started to be kept in 1985.
This week, the average rate in Greater Cincinnati is 5.15 percent, local Realtors say.
As mortgages get more expensive, more would-be homeowners are priced out of the market - a threat to the fragile recovery in the housing market.
If you wanted to refinance at a super-low rate, you may have missed your chance. Rates under 4 percent are still available, but only for loans that reset in five or seven years, probably to higher rates.
For people putting their homes on the market this spring, rising rates may actually be a good thing. Buyers are racing to complete their purchases and lock in something decent before rates go even higher.
"We are seeing some panic among potential buyers who have not found houses yet," said Craig Strent, co-founder of Apex Home Loans in Bethesda, Md. "They're saying: Man, I should have found a house three weeks ago or last month when rates are lower."
It's all about affordability.
For every 1 percentage point rise in rates, 300,000 to 400,000 would-be buyers are priced out of the market in a given year, according to the National Association of Realtors.
The rule of thumb is that every 1 percentage point increase in mortgage rates reduces a buyer's purchasing power by about 10 percent.
For example, taking out a 30-year mortgage for $300,000 at a rate of 5 percent will cost you about $1,600 a month, not including taxes and insurance. But the same monthly payment at a rate of 6 percent will only get you a loan of $270,000.
Dan Brady, mortgage loan officer at US Bank downtown and chair of the Cincinnati Area Board of Realtors Realtor/Lender Committee, says he doesn't expect rates to rise this year beyond 5.5 to 6 percent.
"That's the worse case," he said. "And I don't think that it's enough to hamper affordability."
The change in a quarter percent on $100,000 mortgage, for example, is less than $20 a month, he said.
"If that prices someone out of a home, they probably shouldn't be buying in the first place," he added.
Interest rates have been rising for two reasons. The first is good economic news: U.S. government debt, a safe haven during the recession, is losing its appeal as investors turn to stocks and riskier corporate bonds.
Lower demand for debt means the government has to offer a better interest rate to sell its bonds. The yield on the 10-year Treasury note, which is closely tracked by mortgage rates, has hovered around 4 percent all week, the highest since June.
The second reason is the Federal Reserve. Last week, the Fed ended its program to push mortgage rates down by buying up mortgage-backed securities. When demand from the central bank was high, rates plummeted to about 4.7 percent for much of last year. And business boomed for mortgage lenders as homeowners raced to refinance out of adjustable-rate mortgages and into fixed loans.
As of Wednesday, the Mortgage Bankers Association put the national average for a 30-year fixed-rate mortgage at 5.31 percent. One week ago, it was 5.04 percent.
Many analysts forecast rates will rise as high as 6 percent by early next year. If they go much higher, the already shaky housing recovery could stall. And that could slow the broader economic rebound.
In a normal market, with home prices steadily rising, a jump in rates doesn't cause a big dip in demand. That's because people know their homes will eventually rise in value, and are willing to accept a higher mortgage payment.
But now home prices are flat nationally and still falling in some places. Potential buyers are nervous about jumping in.
"In this environment, any rise in mortgage rates does significant damage because people don't think they're going to get their money back" if prices fall, said Mark Zandi, chief economist at Moody's Analytics.
For people who bought their first home in the 1980s, when rates stayed over 10 percent for several years, paying 6 percent for a home loan may seem like a steal. But it's coming as a shock to many first-time home buyers this spring.
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