- In a previous post, we examined the impact of mortgage rates and house prices on the number of renters qualified to buy to show that lower mortgage rates, rising incomes and changes in house prices have affected the number of renters who could qualify to purchase a median-priced home over time.
- In this post, we look at the impact of mortgage rates ceteris paribus, a latin term used in economics that means “holding everything else constant.” In this case, we’re going to use the same income distribution, home price, and down payment requirement, but we’re going to change the mortgage rates to see what happens to the number of renter households who qualify to purchase the median priced home.
- The table below shows the results of our thought experiment. While 20 million renter households qualify based on income to purchase the median-priced home in 2012 at prevailing mortgage rates, that figure would decline if interest rates were to rise.
- If rates were to return to 5 percent, only 17.6 million renter households would have income sufficient to qualify to purchase the median-priced existing home. A rate increase to 7 percent causes increased monthly payments of $280 per month, and an additional $13,400 is needed to qualify to purchase this home. That type of rate increase would knock nearly 6 million currently qualified renter-households out of the market
- What is the likelihood of increasing mortgage rates? In our current forecast, NAR Research expects mortgage rates to begin to creep up but still remain below 5 percent through the 2014 forecast horizon. Mortgage rates bottomed in November/December 2012 at 3.4 percent for 30-year fixed-rate mortgages. Over the most recent 15 years, rates have ranged from 3.4 to 8.5 percent and averaged 6 percent as seen in the chart below.
- One note about the above calculations. They assume that potential buyers meet credit qualifications and have sufficient cash on hand to close a transaction. Lending standards, credit quality, and access to funds will affect the number of households who will ultimately be able to buy a home.
The average rate for a 30-year fixed rate mortgage hit another all-time low last week according to Freddie Mac. Last week’s average rate was 3.49 percent, breaking the 3.5 percent threshold and more than a full point below the 4.55 percent average from a year ago at this time. While the historic rate means great things for affordability, it also appears to be historically difficult to qualify for these record low rates.
The administration introduced HARP 2.0 in the fall, which among other things eliminated the loan-to-value limits on certain loans refinanced by Fannie Mae and Freddie Mac. Those changes were put in place in March and appear to have made an impact, though that impact is muted. A robust HARP could reduce the cost of homeownership for roughly 3 to 4 million borrowers, thereby prevent some foreclosures in areas experiencing a fledgling recovery, boost confidence in the housing market and help to modestly stimulate the economy.
With a win by the socialist party in France’s presidential election, bond investors will be shifting money into U.S., U.K. and Germany. That means lower mortgage rates, at least temporarily, for U.S. consumers.
The 10-year borrowing rate for German bonds fell and now stands at 1.58%. By contrast, the French government has to pay a 2.78% interest rate. The comparable U.S. and U.K. borrowing rates are 1.86% and 2.00%, respectively.
Generational Low Mortgages
We all know about the current historic low mortgage rates. Today’s report from Freddie Mac survey indicated a 3.55 percent average on a 30-year fixed rate mortgage. Sometimes it is worth reviewing past data, particularly for the younger generation, to check just how low the rates are today.
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