If it hasn’t been tough enough for a homeowner to try to sell their home with REOs and Short Sales bringing down neighborhood prices, now they’ll have to deal with rising mortgage rates too. This week, the average rates for 30-year mortgages exceeded 5% for the first time since early last year. It was bound to happen at some point but the question now is will rates continue to climb? If they do, then that will certainly not help the housing market.
The question is how much will this effect housing prices and how quick. The chart below is from one of our mortgage calculators that looks at what mortgage one can afford at different interest rates (go to calculator).
In this example, a few months ago this person would be able to afford a $450K mortgage when interest rates were at 4.25%. At a 5% interest rate, they can afford a $413K mortgage, a sizeable drop! If interest rates go up to 5.5%, then the max mortgage drops to $390K. So, if you’re sitting out there with a home priced around $500K, this Buyer could have purchased your home when rates were low, but not any more. The open question is if Sellers will need to adjust their price along with mortgage rates and by how much. To take the full effect of risking interest rates, then a home that has been listed more than a few months would need to reduce their list price by about 10% right now, and then more if rates go up to 5.5%. This should be another interesting year.