Today’s blog is based upon National Association Realtors update
NAR – The National Association Realtors predicts mortgage rates will continue to rise. They will probably be near 5 percent by this time next year, compared to the 3.5 percent average of the past 12 months. The rates will be even higher in 2015 and 2016. Certainly, rising rates are bad news for buyers and some potential home buyers will be pushed out of the market.
The chart displays that as interest rates climb, the available buyer pool will shrink in the United States for an average priced entry level house.
Silver Lining from National Association Realtors report
But there is one major compensating factor that can easily neutralize the negative impact of rising rates. As REALTORS® well know, there are many good potential buyers who have been denied a mortgage that in past normal years would have easily qualified. The Federal Reserve has also often commented about the excessively tight underwriting standards in today’s mortgage market. At the same time, banks have been reporting a strong profit growth from mortgage origination due to exceptionally low default rates on recently originated mortgages, particularly since 2010. Such well-performing recent mortgages should not be surprising since defaults do not happen in an environment with rising home prices.
If lending standards and underwriting were to loosen, allowing more buyers into the market, I think we would easily see a 20% jump in buyers entering the market. As interest rates increase, it is possible banks will loosen lending standards allowing more buyers to qualify, albeit at a higher rate.
So, for example, someone with a credit score of 730 would have had no trouble obtaining a Fannie-backed mortgage in the past, but is currently getting denied today.
Evolving Financial Markets and Boulder Housing
There are other factors that can also help alleviate the rising interest rate conditions. The economy is adding jobs. More jobs always lead to more home sales as long as rates do not spike. Furthermore, there could be room for a reduction in fees associated with obtaining government-backed mortgages. The high profits generated by Fannie and Freddie in recent quarters are implying excessive add-on fees charged to consumers by these two effectively government agencies.
Fannie and Freddie need to stick to the simple business plan of guaranteeing soundly underwritten, mostly boring 30-year mortgages, as they are currently doing. These simple 30-year fixed rate mortgages served our grandparents well and they subsequently will serve our grand-kids well. The point is that Fannie and Freddie are making good profits now. They should first speedily repay the taxpayer bailout money. But afterwards, excess profits only mean excessive consumers fees. So a reduction in fees in the near future should occur, just in time to help offset the higher mortgage rate environment.
Bottom line for Boulder Buyers
Interest rates are climbing; why wait to pay more per month for the same house? The National Association Realtors makes a good case that now is the time to get off the proverbial fence and buy your home. I’m here to help. Give me a call or email or visit. I’m Bob Gordon and I’m blogging every day for a year on real estate. Thanks for visiting my site.