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How Will Interest Rates Affect Home Buying?

HousingWhile real house prices stayed relatively flat month over month, according to the July 2018 First American Financial Corporation, home prices rose 12.2 percent year over year. Additionally, real house prices are 37.9 percent below their housing boom peak in July 2006 and 12.0 percent below the level of prices in January 2000.

According to Mark Fleming, Chief Economist at First American, mortgage rates are expected to rise, and notes the incoming Federal Open Market Committee Meeting (FOMC).

“The Federal Open Market Committee meeting is just around the corner and a rate hike is almost certain, according to experts, which will trigger conversations about rising mortgage rates across the housing industry. While changes to the federal funds rate won’t necessarily spur further increases in mortgage rates, mortgage rates are expected to rise nonetheless,” said Fleming.

“Mortgages rates typically follow the same path as long-term bond yields, which are expected to increase due to inflation driven by healthy economic growth. This inflation-driven increase in long-term bond yields will, in turn, increase mortgage rates,” said Fleming. “Due in large part to the strong economy, the 30-year, fixed mortgage rate has increased 56-basis points over the past 12 months.”

According to Fleming, the 30-year, fixed mortgage rate will increase from its current rate of 4.53 percent to an average of 5 percent in 2019. Fleming states the the rate increase will not impact rising home sales, but how will it impact affordability?

“If the mortgage rate increased from its current level of 4.5 percent to the expected level of 5 percent, assuming a 5 percent down payment, and the July 2018 average household income of $64,000, we find that house-buying power falls a modest 5.5 percent, from $366,000 to $346,000,” said Fleming. “In this hypothetical 5 percent mortgage rate environment, consumer-house buying power would be 11 percent lower than it was in July 2017, when the 30-year, fixed mortgage rate was 3.97 percent.”

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About Author: Seth Welborn

Seth Welborn is a Harding University graduate with a degree in English and a minor in writing. He is a contributing writer for MReport. An East Texas Native, he has studied abroad in Athens, Greece and works part-time as a photographer.
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