The Effects of Rising Interest Rates on the Housing Market

As interest rates get steeper, home buyers and sellers are seeing a difference on the national level.

With the effects of the election coming to fruition as we kick off 2017, dips and increases are immediately visible in the various sectors of the market. According to a recently published Wall Street Journal article, a rise in Treasury yields, or interest rates, since the election has resulted in a pickup in mortgage rates, shaping up to be a slow start to the year for housing.

The Commerce Department tracks housing starts as the date when construction of a new home begins. According to a poll by the Wall Street Journal, housing starts remained unchanged in January from the month before. This is a decline from 2016, where housing starts had their best year since 2007.

What is causing the slow start to the year in housing?

One thought is that simply less Americans are moving. According to the Census Bureau, moves from 2016 dropped to a record low of 11.2 percent, with only 20 percent of Americans between ages 25 and 35 changing their addresses in 2016. Meanwhile, a larger portion of the older population has fixed lower mortgage rates and are staying put in fear of those increasing with a new house. In fact, the average 30-year fixed-mortgage rate increased by 4.24 percent, more than half a percentage since the election, according to Mortgage News Daily. The immediate effect being an obvious reason for those with a lower fixed-rate to stay put.

What does rising mortgage rate mean for homebuyers across the world?

Let’s start by first understanding how mortgages are designed. According to Alan Share, senior vice president of NorStates Bank, a potential buyer’s total monthly debts, or principal interest, is totaled with the taxes and insurance on the house to qualify for a mortgage. This payment should not be more than 28 percent of your gross monthly income. Loans are then added, like credit cards or car loans, and should not total more than 40 percent of your gross monthly income.

To put all of the pieces together, when interest rates are low, those parts of the equations are lower. Unfortunately, this is not the trend new homebuyers are seeing.

“When rates go up, less people can qualify for loans,” explained Share. “This has a multi-tiered effect. When less people are able to qualify for a loan, it’s harder to sell a home because there are less eligible candidates.”

As a result of the rise, mortgage applications fell in February 2017 to a 13-week low, according to a survey done by Mortgage Banker Association.

And as the housing market continuously sees its ebbs and flows, homebuyers will always be at the mercy of the numerous factors that affect where the market stands. Things like high or low interest rates will either make or break the sale, and unfortunately, are consistently changing. Because of this, it’s important to learn where you stand and how to read the numbers to know when is the perfect time to buy and sell.