In­ter­est rates will fur­ther strain hous­ing af­ford­abil­ity

The Denver Post - - BUSINESS - By Joe Ru­bino

LAS VE­GAS » In a lo­cal and na­tional hous­ing mar­ket al­ready rife with chal­lenges — par­tic­u­larly soar­ing costs amid low, low sup­ply — an­other is­sue is primed to fur­ther drag down peo­ple’s abil­ity to buy homes: ris­ing in­ter­est rates.

The Fed­eral Re­serve’s in­ter­est rate hike an­nounced Wed­nes­day played out in real time at the Na­tional As­so­ci­a­tion of Real Es­tate Ed­i­tor’s con­fer­ence in Las Ve­gas. Speaker Joseph Na­has, chair­man of in­ter­na­tional real es­tate ad­vi­sory group, the Coun­selors of Real Es­tate, an­nounced in the morn­ing that the Fed was likely to hike bench­mark rates to 2 per­cent, up from 1.75 per­cent.

A few hours later, Tay­lor Marr, a se­nior econ­o­mist with Seat­tle-based real es­tate bro­ker­age Redfin, took the stage to say the new rate had been con­firmed. That fed­eral bench­mark in­crease sets the stage for higher mort­gage rates across the coun­try.

What does that mean for home­buy­ers? Na­has’ group, in its an­nual list of is­sues fac­ing the na­tional real es­tate mar­ket, ranked in­ter­est rates and the econ­omy as the No. 1 short-term chal­lenge.

Higher rates stand to make the na­tion’s af­ford­abil­ity cri­sis even worse by mak­ing mort­gages less af­ford­able, the Coun­selors ar­gue.

“It may be painful in the short run. We may have a slower num­ber of new home pur­chases or re­sales due to higher mort­gages rates but in­fla­tion wont get out of con­trol and the econ­omy will con­tinue to grow at a mod­er­ate pace as op­posed to and over­heated pace,” Na­has said of the Fed’s think­ing.

Redfin sur­veyed 4,000 prospec­tive home­buy­ers across the coun­try late last year about what they might do if av­er­age mort­gage rates went over 5 per­cent af­ter years of hov­er­ing around 3 per­cent. One in five re­sponded they would speed up their time­line to buy.

“There is this pres­sure to hurry up and buy be­fore rates rise be­fore they can no longer af­ford that same mort­gage,” Marr said.

In­creased ur­gency could hurt af­ford­abil­ity in ul­tra com­pet­i­tive mar­kets like Denver. It raises like­li­hood of bid­ding wars emerg­ing for homes, par­tic­u­larly those on the lower end of the mar­ket.

“Bid­ding wars are in­creas­ingly com­mon,” Marr said Wed­nes­day. “More than half of the of­fers our agents sub­mit­ted on a homes en­coun­tered com­pe­ti­tion in the 15 largest mar­kets that we tracked in the last 18 months.”

Redfin’s re­search lumps Denver in with mar­kets like San Diego, Los An­ge­les and Phoenix when it comes to high hous­ing costs. In each of those mar­kets, fewer than 10 per­cent of homes on the mar­ket are rated as af­ford­able to peo­ple mak­ing the area me­dian in­come.

For all the pres­sure ris­ing in­ter­est rates could ap­ply to the hous­ing mar­ket, it can be ar­gued that their con­tin­u­ous de­cline over

the last 30 years contributed to the af­ford­abil­ity predica­ment the coun­try now faces.

Chris Her­bert, man­ag­ing direc­tor of the Joint Cen­ter for Hous­ing Stud­ies at Har­vard Universi- ty, noted at the real es­tate edi­tors’ con­fer­ence Wed­nes­day that av­er­age monthly mort­gage pay­ments in the U.S. are lower to­day than they were in 1987. Back then, av­er­age in­ter­est rates were above 10 per­cent.

Three decades of de­clin­ing rates al­lowed more peo­ple to get into bid­ding wars for homes, heat­ing up the mar­ket. In the long run, higher rates could cool down costs, Her­bert said.

“This is not go­ing to play out over six months, it is go­ing to play out over years,” Her­bert said. “In the longer run, I ex­pect it will slow the rate of home ap­pre­ci­a­tion. In the short run, we’ll have less af­ford­abil­ity.”

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