Rising Mortgage Rates Should Motivate Home Buyers

Rising Mortgage Rates Should Motivate Prospective Home Buyersrising interest rates


Imagine driving along on a quiet neighborhood road at 25 mph and then finding yourself instantly traveling 55 mph?  Well that’s essentially what happened with mortgage interest rates during a one week period in mid-June.  Now, there’s nothing too alarming about driving 55 mph, but when you were calmly doing 25 mph and suddenly get that kind of instant jolt it can freak you out.

In the home buying and mortgage banking world it had just that kind of impact. It sent buyers, sellers and borrowers scattering all over the road in utter panic – a panic that forced most to trade the long view of home ownership for the short view. This, of course, is never a good idea.

Many economists are forecasting a rise in home prices that could reach as high as 40% in the next 24-36 months (even controlling for higher interest rates). How is that possible you ask?

Two things:

  1. According to a national appartment report, the demand for housing expands: increased population, buyer re-entry from foreclosures/defaults and the decrease in rental vacancies all work to inspire increased demand.
  2. The country essentially stopped building new homes from 2007-2012.  According to the National Association of Home Builders we have insufficient inventory.

The bottom line is that price is king in real estate. You can always change the interest rate you paid by refinancing when rates go back down. No such mechanism exists for the purchase price of a home; what you paid cannot be changed – ever.

So those people deciding not to buy today’s $200K home at 4.5% (because a few weeks ago the rate was 3.5%) may soon come to find that same house will cost them $240K, maybe even $280K. Said another way, real estate prices today are what they were in 2003. How much longer before they become the prices we had in 2004, 2005, 2006? Answer me that riddle as you sit and wait for 3.5% to come rolling back.

In the meantime, your bet should be on price, not rate.