Mortgage Interest Rate are Going Up…….Really

By: Victor Normand
Published: October 2015

Mortgage interest rates have been at historic lows since the Great Recession in 2008 and hovering around 4% all during the past year. As real estate professionals, we have been advising clients to expect the rate to increase for several years now, but they have not. As recently as last summer, rate increases seemed certain; likely in September, now early next year is the expectation.

The focus of attention is the Federal Reserve and their use of interest rates along with changes in the money supply to steady the US economy. In actuality, the Fed sets a “target” rate on the interest rate banks charge one another for overnight loans needed to adjust their reserve balances. This “target” rate setting strongly influences all other rates including mortgage interest rates.

The highest Fed Funds rate was in 1981 at 15.87% and the lowest is essentially now at .14%. The 30 year fixed mortgage interest rate in September of 1981, the peak, was 18.16%, the lowest rate was 3.35% in November of 2012.

Source: Mortgage News Daily

The further effect of the Fed Fund rate at near zero percent has been very low interest rates on bank deposits, money market funds and fixed income investments (bonds). Some economists suggest that the run up in the stock market is the result of investors and fund managers looking for higher returns and finding them only in equities. The result, which seems to be happening presently, is an overvalued stock market in need of a correction.

So, where is the best place to invest? How about residential real estate in general, a home you live in to be more specific. Financial advisors do not recommend that the average investor borrow money to buy stocks or bonds but borrowing money to invest in your home makes sense, though both approaches have the potential of leveraging cash and creating extraordinary returns. Both forms of investment have risk and as we have seen, values can decrease, sometimes significantly. It takes a great deal of investment discipline to hang on to devalued stocks but riding out the bad times in the home you live in, well……….not so much.

A recent phenomenon in the downsizing marketplace has been using most if not all of the proceeds from the sale of the big house to purchase the downsized or retirement home rather than investing any excess cash. The reasoning may be that the best way to preserve capital, which for the older buyers is their estate, is to keep it in real estate where, as an added benefit, they get to enjoy the upgrades in the new home.

As the economy improves, inflation will begin to rise at a faster rate, wages will start heading up and the Fed will definitely tighten the money supply and cause interest rates to rise. The resultant rise in mortgage interest rates will put some downward pressure on home price appreciation but the fundamental of home ownership will remain attractive. Turmoil in the financial markets does affect the economics of housing, but sleepless nights are less common in your own home.

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 (  U.S.Census Bureau (

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.

First Time Home Buyers – A Call to Action

By Victor Normand
Published: July 2013

The 25 to 34 year old demographic typically makes up the largest percentage of first time home buyers, but they are largely absent from the scene nationally and in our market.  Beset with student loans, challenging job circumstances and a conservative lending environment, these future homeowners are holed up at home with their parents or in rental units waiting for things to change.

The economy is improving, but not fast enough to deal with the unemployed or underemployed who might like to own their own homes.  And lenders are cautious in making loans to those who might have good jobs with good incomes and good potential for advancement, but they have education debt (which they are managing) and only a little cash for a down payment.

That’s not to say that programs aren’t out there to help.  The Governor recently announced a new initiative called the “Home Ownership Compact” to help first time buyers.  Six banks in the State of Massachusetts have signed on to this initiative, which should be rolling out very soon.. However, the major players behind almost all of the mortgages made in the country — Fannie Mae, Freddie Mac, and the FHA — are effectively on the sidelines when it comes to first time home buyers as we have described them.

Expect that to change at some point, now that interest rates have begun to rise and the refinance market has come to a near halt. The big banks seem to have more influence on the aforementioned government-backed entities than your average consumer, and soon they will look for new markets to replace their lost refinance business. For those first time buyers who have good jobs, less than perfect credit (as in paying down student loans), and little cash, some creative borrowing may be in order.

In the past we have suggested that borrowing from parents may be a good option.  Most 401(k) employer sponsored programs allow participants to borrow from their own accounts; often with very low interest which accrues to the participant.  Even IRA’s funded by a potential first time home buyer allows contributors to take penalty free distributions for the purchase of a home.  Given the low rate of return on these accounts, an interest bearing loan to a first time home borrower can be a good investment.   Get the facts to see if it’s a good option for you.

Recently, we have shown that the purchase of a condominium can be a good investment.  In fact, in our market, most condominiums priced under $175,000 are being purchased by investors, usually with cash.  Unlike recent single family home sales, which have been showing increasing price appreciation, condominium sale prices continue to decline, while rents on these units have been increasing.  On the basis of an income approach to value alone, sale prices for condominiums will eventually rise.
Every real estate deal is unique with different criteria involved depending on the condo complex.  Ratios of Owners vs. Renters come in to play along with knowing what specific type of financing might be available. Trust a “Resident Expertsm,” to apply their knowledge and expertise to insure a smooth transaction. You’ll move quickly through the potential pitfalls and learn something about the real estate market. It’s what we know that makes the difference.

A Housing Bubble in the Making – Not Here, Not Now

By: Victor Normand
Published: June 2013

As we have said recently, the housing market has changed from a buyer’s market to more of a seller’s market, with the resulting increase in home sale prices.  Anecdotal evidence all portray a hot market on the verge of going bubble: multiple offers, bidding wars, buyers camping out.  And in fact in some markets, mostly on the west coast and down south, home sale prices have seen double-digit, year over year increases.  But the housing market as a whole seems far from being in danger.

Prices everywhere are rising for some very predictable reasons.  The National Association of Realtors reports a 31% increase in buyer traffic over the last year. Additionally, inventory and interest rates remain low, and in general, the economy is steadily improving as is consumer confidence.  But home prices still have a ways to go before getting back to their pre-recession peaks.  None of the twenty markets tracked by the Standard & Poor’s Case-Shiller home price index has returned to these peak levels.  The Boston market declined by more than 15% and has regained about 8% of that loss in value.

The towns in our market that we track have similarly done well in gaining on the highest prices paid before the recession, particularly over the past year, but there’s still room to grow.  The chart below shows peak average sale prices for single family homes from 2004 through 2006 and compares them to recent sale prices.

The averages are for the same style home throughout the analysis.

So, what is likely to keep prices from increasing into dangerous, unsustainable levels?   According to Jed Kolko, chief economist for Trulia, three factors are at work to produce a stable market:

  • Inventory should expand in response to demand
  • Mortgage interest rates should rise as the economy strengthens, and
  • Investor interest in undervalued properties should fade

A stable housing market is in everybody’s interest.  Both buyers and sellers are best served when housing decisions are made for personal reasons and not out of “irrational exuberance” as former Federal Reserve Board Chairman, Alan Greenspan once said.   And the Resident Experts(SM)are available to help you deal with all your rational exuberance.


The Market Effect of Rising Interest Rates and Home Value Appreciation

By: Victor Normand
Published: April 2013

While Zillow is usually not an accurate measure of a properties worth with their “Zestimates®” model and should be verified with a local Agent, their research in the field seems very credible.

They recently surveyed over 100 economists on the subject of expected home price appreciation over the next five years and produced a consensus summarized in the chart below.

The report shows an expected price appreciation of about 4% annually for the market as a whole. There is much that can go awry, and every market is different, but increasing home prices seems a good bet for the next several years.

With this in mind, it might seem to make sense to wait before going forward with listing your home.

List Now or Wait for Better Pricing

Federal Reserve policy will keep mortgage interest rates low for a while, at least until the unemployment rate goes below 6.5% or inflation rises above 2%. Currently at around 3.5%, expect interest rates to rise heading toward their historic average of around 6%. When that begins to happen, consumer buying power will effectively decrease. How much? It is actually quite dramatic. The Buyer with 20% down who is qualified to buy a home in Acton with an average price of $620,000 can only afford to buy a home priced at $539,000 if interest rates rise to 5%.

The chart below shows what happens between now and 2016 under the following conditions:

  • Home prices increase at 4% annually
  • Savings for down payments increase at 4% annually
  • Income available to pay a mortgage increases at 4% annually
  • The mortgage interest rate increases one percentage point from 3.5% to 4.5%

The point here is that the qualified buyer for your home today, even if their income and savings for the deposit rise by 4% annually, will have $60,000 less buying power, given only a 1% rise in mortgage interest rates. The upshot is that the pool of prospective buyers shifts to lower priced homes, effectively putting downward presser on prices.

So here are the variables:

  • Will homes appreciate in price as much as predicted?
  • Will household incomes rise?
  • Will inflation remain low?
  • How quickly will mortgage interest rates increase?
  • How will all of the able interact

What does all this mean? Essentially, it means that if your personal life circumstance would be best served now by downsizing, trading up or down, or cashing out, waiting for the best time to do that because of perceived market conditions may not be the best advice.

So, if you are happy with your current home and you know it – Love It; if you really should make a change, then List It. Get on with life and if a move is indicated, talk to a Resident Expertsm straight away.


While Interest Rates are Low: A Good Time to Buy and a Good Time to Sell

By: Victor Normand
Published: October 2012


FHA Minimum

Interest Rate




Term (years)




Purchase Price


 $      590,000  $  523,800  $  427,900


 $        20,650  $    18,333  $    14,977

Loan Amount

 $      569,350  $  505,467  $  412,924

 Mortgage Payment

 $           2,637  $      2,637  $      2,637

New Qualified Price

 $    66,200  $  162,100

Number Homes now Excluded



Percent of Homes on the Market




Current average list price in Acton


While Interest Rates are Low: A Good Time to Buy and a Good Time to Sell


The link between mortgage interest rates and purchasing power is well known but it doesn’t hurt to remind ourselves of the impact by seeing the numbers in print.  The chart below uses the current 30 year mortgage rate (3.75%); a rate one point higher (4.75%); and the historic long term average rate (6.6%) to demonstrate the financial impact of changing rates.  The monthly mortgage payment ($2,637) is held constant and assumes that this is the maximum monthly payment a borrower has been qualified for.

The change is dramatic.  A rule of thumb is that every one point change in rates translates into about a $60,000 change in borrowing capacity.  So, whether you are shopping for value or looking to maximize your borrowing capacity, it could not be a better time to buy particularly since rates don’t have much lower to go, and everyone believes they will surely go higher, never to return to these levels in our lifetime.

But what should potential Sellers do about these rates?  Clearly, if low rates produce more Buyers, that has to be good for Sellers.  Remember economics 101, increased demand leads to increased prices.  But what are the consequences for Sellers of waiting for prices to increase?  Not much, if you believe that nothing else will change in the economy.  And, as we have already said, the prospect for increased interest rates is great.  While rising interest rates do not usually cause home prices to decline, they will cause Buyers to lower their sites and look for less costly homes on the market, since the value of pre-qualification statements is directly tied to interest rates.

In the current Acton Housing market where 72 properties are listed for sale, our theoretical Buyer qualified for a mortgage at $2,637.  If rates went one point higher this Buyer would have 9 fewer properties that she could afford; and if the rate went back to the historic average rate of 6.6%, then 17 properties would be closed off to her.

So essentially, every time the rates go up, every Buyer group drops down a bit, sort of like musical chairs where most are still able to find a seat, but one participant always gets left out every time the music stops.  In this case, the participants getting left out are higher priced homes.

So, if you are thinking of selling your home, consider the impact of rising interest rates and contact a Resident Expertsm soon and develop a good selling strategy for yourself.