After months of record lows, interest rates are on the rise. That’s great news for people with interest bearing savings account, but not such good news for people looking to buy a house. In just the last six months or so, interest rates have risen from below three percent to more than five percent. What does that mean for prospective home buyers? Well, for those looking at a median priced home in the United States, it means having to pay about $300 more a month or $130,000 over the life of a typical loan. You might think that with a little belt tightening-maybe a few less meals out for example-that you could still afford a median-priced home, but maybe not. If you’re like most people, you’ll need a mortgage. Last October when interest rates were lower, you needed a salary of $61,400 to qualify for the mortgage on a median-priced home. Now, you’ll need an income of about $84,000. Indeed, it’s expected that higher interest rates will price about 16 million potential home buyers out of the market, about 2.3 million of whom are first time buyers.
Yet, despite the grim news, economists don’t expect the market to crash. About 43 percent of today’s buyers are millennials reaching peak buying age. That, together with the fact that along with interest rates, rents have also been rising, suggests that demand for new homes will continue to be strong. One area where buyers could get some relief is on the price of just about everything else. Higher interest rates should help cool inflation, bringing prices down at the grocery store and gas pump. However, even with higher interest rates and rising mortgage costs, pent up demand, especially in coastal areas, makes it likely that those looking to sell their home will still be able to command a decent price at least for now. Indeed, those looking to make their homeownership dreams a reality, rather than continue to pay what are some of the highest rents in recent history, may find that their new home comes with a high price and an expensive mortgage.
Discussion Questions:
1. How are interest rates determined?
2. Why are interest rates rising? What is the relationship between interest rates and inflation?
3. Discuss the spillover effects of higher mortgage rates. Which industries could feel the effects of a moderating housing market?
Sources| WSJ: Mortgage Rates Are Now 5%. Here’s What That Means for the Housing Market, Decade-High Mortgage Rates Pose Threat to Spring Housing Market; NY Times: How Rising Mortgage Rates Are Affecting the Housing Market; Photo by Tierra Mallorca on Unsplash