Last month the Federal Reserve surprised a lot of people by keeping interest rates at their current, historically low levels. They’ve been set basically to rock bottom since the financial collapse of September 2008, but the consensus among economists and the business community is they’re going to be raised -- and soon.
Have you thought about what interest rates mean to you? For home buyers and home sellers alike, any change in interest rates has profound implications. That’s especially true now, since interest rates have been so low for so long. Borrowing costs are sure to increase. The big question is when.
"Most observers are looking to December now as the most likely time for something to happen this year, which means there may be no better time than now to buy a home."
Before the recent market turmoil the best guess was for a rate hike in September, but the deadline came and went without any movement. There’s an outside chance the Fed may make their call this month, but most observers are looking to December now as the most likely time for something to happen this year. Which means there may be no better time than now to buy a home, for a couple reasons.
The most obvious reason why has to do with your monthly mortgage payment -- even a modest increase in your interest rate can mean a much higher expense. For example, at 3.7 percent the monthly mortgage payment on a $300,000 home is just under $1400 per month. At 5.25 percent that payment rises to almost $1700, about a $280 per month increase. For many, that’s the equivalent of a car payment.
Another reason has to do with affordability. Home prices are projected to be fairly stable in the near term, although perhaps rising gradually. Right now, there’s no reason to expect prices to make a strong move in the other direction.
"But the rise in home prices is expected to outstrip the rise in average household income, which translates to lower affordability for the average home buyer."
But the rise in home prices is expected to outstrip the rise in average household income, which translates to lower affordability for the average home buyer. (The National Association of Realtors uses a Housing Affordability Index to measure “whether or not a typical family earns enough income to qualify for a mortgage loan on a typical home at the national and regional levels based on the most recent price and income data.”)
Taken together, those two facts mean this may be the best time to buy a home we’re likely to see in our lifetimes. Both prices and borrowing costs are almost certain to go up faster than average household income, and the likelihood of returning to the unprecedented interest rates we currently see once the Fed begins the process of “rate normalization” is extremely low. Neither home prices nor borrowing costs will get cheaper any time soon.
Sellers face a different set of considerations. While it might be tempting to hold off on selling a home at a time when housing prices have been gradually lifting, the truth is higher interest rates exert a downward pressure on the market by reducing the overall number of qualified buyers. And the reasons for selling a home differ, depending on your circumstances; if you need to sell your home for personal reasons -- say, downsizing -- there’s really no reason to wait.
Unless housing prices are soaring and the market is piping hot (and there’s no sign of either of those things occurring in the foreseeable future) holding off for a while in the belief you’ll get a significantly higher price isn’t likely to make much of a difference. [Do the numbers on what the specific gain really is after paying additional taxes, maintenance, etc.]
Clearly, the highly unusual economic circumstances we’ve been living under for the last seven years or so are about to come to an end. For buyers especially, the changes will mean less favorable conditions for making what is surely one of the most significant financial moves of their lives. Owning your own home comes with a lot of benefits, not the least of which is pride of ownership. But in purely financial terms, it’s also the biggest commitment of net worth most of us will ever make.
Given that fact, prudent financial planning dictates getting the most value for your money -- and that means, at least in terms of buying a home, the cheapest financing you can get. With time running out on near-zero Federal Reserve rates, and mortgage rates certain to begin moving up very soon, the moment to act is now. Own it.
Maria Barr is the team leader of The Maria Barr Team at Select Sotheby’s International Realty.