Whelp, after settling in for a moment around the 4.5% mark, long-term fixed mortgage rates inched ever closer to 5% last week.
Who would want to be stuck with a rate that high, especially when all the neighbors have rates in the 3% range? Yes, I’m somewhat joking, but there is this type of distorted mentality at the moment.
Ever since mortgage rates began their ascent back in May, it seems there’s been more good news than bad, with positive economic news typically bad news for interest rates.
And there will probably be a lot more good news as the economy continues to turn itself around.
It’s also no secret that the Fed is planning to taper purchases of mortgage-backed securities, which will inevitably reduce demand, and thus price, resulting in a higher yield and interest rate for consumers.
We Should Be Happy, Right?
When it comes down to it, we should be happy the economy is improving, and that we no longer need the Fed to keep interest rates down.
Heck, we may finally be able to collect some respectable amount of interest in our savings accounts again.
But you have to wonder what will happen to the real estate market, which, let’s face it, has been getting a lot of help from the ultra-low mortgage rates on offer.
Now that they’re nearly two percentage points higher than they were before summer, there’s a lot of uncertainty in the air about what effect they might have on home prices, home buyer sentiment, and so forth.
It’s not just speculation though – a recent report revealed that only 36% of prospective buyers can afford a home in California now, which is the lowest share since 2008.
The silver lining is that inventory is still quite low, so sellers don’t necessarily need a large pool of buyers to offload their properties.
Did the Fed Create a Monster?
Funnily enough, this is all happening while mortgage rates are still historically low.
Per a recent John Burns newsletter, interest rates on the 30-year fixed hovered around 5.72% over the past decade, and 6.52% over the past twenty years.
And rates are still nearly half the 40-year median of 8.15%. In other words, it’s not as bad as it appears. The recent increase in rates just feels really terrible because the Fed gave us a taste of something we’ve never seen before.
It’s almost like they ruined low rates for us, which will never be looked at quite the same way. Still, it could be worse, and probably will be worse in the not-so-distant future.
It almost seems inevitable now that rates on the 30-year will soon crack the 5% threshold, which is probably more mental than it is devastating to a homeowner’s pocketbook.
In terms of monthly payment, it’s only about $250 more per month for a rate of 5% versus 3.5% on a $300,000 loan, which is a massive change in rate.
Of course, the larger the loan amount, the bigger the increase in payment. For a $1 million mortgage, you’re looking at a payment difference of nearly $900 a month. So it can be quite significant.
To sum it up, while today’s rates probably don’t look very attractive compared to recent lows, they might look a whole lot better in late 2013, or early 2014, when rates are heading toward 6% again.
At that time, plenty of borrowers will probably be kicking themselves for not locking when rates were 3.75%, 4%, 4.5%, or even 5%.
Read more: Watch out for the adjustable-rate mortgage pitch.