Rising Interest Rates and the Local Housing Outlook

By Victor Normand
Published: January 2014

The good news for the housing market is that the economy is improving.  Job creation is getting better and incomes are growing.  The bad news for home buyers, and sellers who need buyers, is that the economy is improving.  Of course, that news is not really bad, but it is changing the marketplace.

The Federal Reserve is easing up on its purchase of mortgage backed securities resulting in the expected rise in mortgage interest rates.  Last month, when the Fed finally followed up on its intention to “taper off” its level of purchases, the markets reacted calmly and interest rates went up only modestly.  That was a good thing.  Now economists are wondering what the longer term impact on housing will be.

Even before the Fed acted, interest rates had been going up from their historic lows (3.34% in May of 2013).  At the current rate of 4.50%, it is hard to say if the increase has had an effect on the market.  Nationally and locally, sales have softened a bit but that may have as much to do with the lack of inventory as anything else.  The math tells part of the story. Presently, the median price for a single family home in Acton is approximately $520,000.  For every 1/8th percent increase in the rate of interest on a 30 year mortgage, the consumer loses about $5,500 in buying power.  This example below holds the term, down payment, and monthly payment constant, showing how significantly purchasing power and interest rates are inversely related.

Mortgage Interst Rate Chart
However, as the charts below show, dramatic changes in home mortgage interest rates as seen during the 20 year period from 1972 to 1992, seem not to have effected home value appreciation.  Nationally, values rose steadily during the same period when interest rates fluctuated by more than 10 points, peaking in January of 1982.  Home price appreciation averaged 8.5% during this period despite extraordinarily high interest rates, which has more to do with annual inflation running at 6.4% and increases in median household income of 6.1% during that same period.

jan blog chart 3jan blog chart 4
Source: Freddie Mac (http://mortgage-x.com/general/historical_rates.asp  U.S.Census Bureau (http://www.census.gov/construction/nrs/historical_data

All this helps to explain why the recent low interest rates, nearly as low as they have ever been in history, were not enough to restore home values.  The Great Recession began in December of 2007 and lasted for 16 months, bringing  about low inflation and low household income growth as well as low interest rates.  In Middlesex County, sale prices fell by 15% from their peak and were not able to reach their pre-recession levels until 2013.

So, as the economy improves, look for increased sale prices and increased numbers of sales. If anything, rising interest rates will cause buyers to enter the market fearing even higher rates to come.  Interest rates are an important factor to consider when making a real estate decision and do influence consumer behavior. Call on a Resident Expertsm to help you keep all of the factors in perspective.