Mortgage rate hikes adding to buyer woes

Purchasing a Bay Area home could get more painful as interest rises

Mortgage rates are on the rise — nearly surging to a four-year high — a trend likely to add additional headaches to the already daunting task of buying a home in the Bay Area.

The average interest rate for a 30-year, fixed-rate mortgage has jumped up almost half a percent since the beginning of the year, according to Freddie Mac, and some experts expect it will keep rising. And even though at 4.38 percent rates still are historically low, that recent increase could make it harder yet for young or lower-income homebuyers to afford the house they want.

“It makes it tough for first-time homebuyers,” said Morgan Hillbased real estate agent John Espinosa of Heritage Realty Group. “There’s no doubt about that. And my heart goes out to them, because I know that they struggle.”

As mortgage rates go up, forcing potential homebuyers to pay more in interest, their buying power goes down, Espinosa said. Suddenly they may no longer qualify for the loan they need to buy their dream home, he said. That could require them to come up with a larger down payment, an obstacle that could force them

out of the market.

Over the long term, however, rising rates could bring some relief to the Bay Area’s squeezed housing market. As the bump in rates edges out buyers who before could just barely afford a home here, the demand for homes goes down, which could help tame the region’s runaway prices.

But for the Bay Area to see any impact, mortgage rates will have to jump much higher, said Dick Lepre, senior loan adviser for RPM Mortgage. If rates increase another half a percent, it might slow the speed at which home prices are going up, he said. If rates increase a full percent, home prices might flatten.

“But for the housing market here in the Bay Area,” Lepre said, “frankly I think it’s so crazy … that we’re not yet to the point where interest rates are going to have a serious effect on prices. It may take a few people out of competition, but it certainly isn’t going to take enough people out of competition that somebody who would have made the highest offer otherwise is going to be turned away.”

He credits the recent jump in mortgage rates to a booming economy, which has spurred fears of inflation. The U.S. added 200,000 jobs in January, while unemployment remained constant at 4.1 percent, according to the latest numbers from the U.S. Bureau of Labor Statistics.

Even so, mortgage rates remain much lower than the market has seen in the past. Rates reached more than 6.6 percent 10 years ago, according to Freddie Mac. Before spiking to 4.38 percent last week, rates for conventional 30year, fixed loans peaked at 4.41 percent in April 2014.

To afford a house in the expensive Bay Area, many homebuyers take out jumbo mortgages — loans of more than $679,650 — which generally have lower rates than other mortgages, Lepre said.

The recent rise could give some potential sellers cold feet as they worry they will lose their current low mortgage rate if they buy a new home, said Espinosa. That could further reduce the already tight supply of houses on the market in the Bay Area.

Espinosa predicts mortgage rates will keep going up, hitting 5 percent or more by the end of the year. With that in mind, he has one piece of advice for potential homebuyers:

“If you’re planning on buying a house,” he said, “it’s probably better to pull the trigger sooner rather than later.”

“Frankly I think it’s so crazy … that we’re not yet to the point where interest rates are going to have a serious effect on prices.” — Dick Lepre, senior loan adviser for RPM Mortgage