For 2017, many see higher US mortgage rates, home prices
Nate Lowenstein has been shopping for a home in Los Angeles, on and off, for more than a year. His search has been stymied by a stubbornly low roster of homes on the market and the hurdles that come with it: multiple competing bids and higher prices. “It’s not a great market, from a buyer’s perspective,” said Lowenstein, a lawyer. “The one good thing is that interest rates were quite low.”
As recently as last summer, homebuyers had ultra-low mortgage rates on their side. It was good news for any borrower, but especially for those in expensive housing markets like Los Angeles, Boston and Seattle.
That was then. While mortgage rates remain very low by historical standards, they’ve risen sharply over the past couple of months, with the average rate on a 30-year fixed-rate mortgage reaching 4.2 percent this past week. The rate got as high as 4.32 percent a week before that, its highest level since 2014 and well above the past year’s average of 3.65 percent. Economists predict that mortgage rates will continue to climb this year, just one of the trends that suggest that 2017 will be a more challenging year for homebuyers.
“With higher mortgage rates, you’re increasing the cost, challenging the budgets, challenging the ability to qualify and, as a result, likely reducing somewhat the pool of potential buyers,” said Jonathan Smoke, chief economist for Realtor.com.
So far, the rate increases haven’t begun to worry Lowenstein, who is in the market for a house with at least three bedrooms in LA’s affluent west side. His budget: Between $1.6 million and $1.8 million.
“We’re not priced out yet,” Lowenstein said. “But if it goes up to 5 percent or 6 percent, at some point we would be.”
Long-term mortgage rates tend to track the yield on the 10-year US Treasury note. The yield goes down when investors bid up bond prices, as they did following last summer’s vote in Britain to exit the European Union. The move sent long-term mortgage rates tumbling as low as 3.41 percent.
The reverse happened after Election Day. Investors bet that a Republican-controlled White House and Congress will have a clear path to implement policies that will drive inflation and interest rates higher. A sell-off in US bonds drove the yield on the 10-year Treasury note in mid-December to the highest level in more than two years, and mortgage rates have floated higher with the tide. But will they continue to do so? Smoke predicts mortgage rates will reach 4.5 percent in 2017. Other economists expect rates to remain above 4 percent but not to go beyond 5 percent this year. That range would mean mortgage rates that would be low compared with the past decade.
Average long-term mortgage rates were above 6 percent during the height of the last housing boom, and they hadn’t hit 5 percent before 2008.
So someone looking to buy a home in the next few months doesn’t need to panic, said Svenja Gudell, chief economist at Zillow, a real estate information company.
“My advice to buyers would be to not freak out and feel a sense of urgency,” she said. “If you aren’t able to buy a house at 4.5 percent, you probably weren’t able to buy a house at 4 percent.”
The stakes are a bit higher for buyers in expensive markets, where housing can eat up a much larger share of household income. If mortgage rates continue to climb, there are moves that would-be homebuyers can make to better offset some of the higher borrowing costs.
Consider lowering the interest rate by paying a fee to the lender up front, something known as buying down the interest rate. Or go with an adjustable-rate mortgage, which has a low fixed rate for a few years, typically five or 10, then adjusts to a higher rate.
Another move: Ask the seller to pay the buyer’s closing costs. That can free up more cash for buyers to manage the higher borrowing costs. Higher mortgage rates could have one silver lining: As some buyers are priced out, sellers may have to be more flexible on prices. Over time, that could help stem home prices. Low inventory and strong demand helped increase prices in 2016 at the fastest pace in 10 years, according to an analysis by Zillow. The company predicts that U.S. prices will increase about 3 percent on average in 2017, down from a gain of about 6.5 percent last year.