Interest rates will further strain housing affordability
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.”