This year we’ve seen and heard the buzz about “high” mortgage rates and how they’re continuing to climb, but right now rates are still at historic lows. Qualified home buyers are constantly outbid by competing offers and facing a market with high demand but low housing supply. There are benefits to rates increasing: a leveled out housing market, reduced risk of another housing bubble, still historically low rates, and new mortgage products from investors.
1. Balancing Housing Supply
Right now, the housing market is incredibly hot. This competition is preventing more and more families from getting into their dream home. If mortgage rates were to increase to 6% in 2019, we could see the housing market start to balance out, allowing more people to achieve their dreams of home ownership. In some areas around the country, there are up to 10 families bidding on a single home.
The last time the economy was this hot was the mid-1990’s. Mortgage rates were around 8% and right now they are less than 5%. If we see rates rise to 6% again, that’s still a historically low rate. This will help qualified buyers start to see less competition in the market and with this balance, we should see the number of transactions climb by 30 – 40%. Families would be achieving their dreams of home ownership without as much stress and competition for the same home.
2. Reducing the Risk of a Housing Market Bubble
Home prices can’t continue to increase at 8-10% a year because it just isn’t sustainable. The annual increase in prices should be closer to 3-5%. A steady incline of prices is healthier for the economy long-term rather than drastic jumps and changes. Interest rates climbing to 6% will naturally help bring that home price appreciation back down to a more stable level year-over-year.
3. Mortgage Rates at 6% are Historically Very Low
Rates at 6% are still historically low. The unemployment rate is at all-time lows, and GDP growth was at 4% last quarter – overall the economy is in the range of the late 90’s. At that time, mortgage rates were at 8%. An economy this strong combined with 6% rates would be highly attractive for home ownership.
4. Stronger Returns on Investments
If rates go up, investors could receive a 6% return on their investment. Mortgages have performed at high levels, even higher than real estate trusts from a low-risk standpoint. Real estate trusts and other safe investments typically yield approximately 5%. Therefore, a 6% yield in a lower risk instrument would attract a lot of demand from investors. Conventional mortgages compared to government-backed mortgages could add value for homeowners.
5. New Products from Investors
An increase in rates would also mean an increase in products from investors. Down payment is the biggest hurdle for most potential home buyers, but with a mortgage rate increase, we would likely see investors create down payment options – assuming strong credit. This would be a huge bonus for families who would have to save for years to buy a home, for instance, teachers and firefighters.
Fannie Mae and Freddie Mac charge higher rates for low down payments for investors, second home transactions, and low FICO scores. Those types of borrowers could see more opportunities from investors who wouldn’t charge as much for those buckets. Investors would also have increased interest in Jumbo Loans.
Overall, at a rate of 6%, we would see an increase in transactions, balanced inventory levels, reduced risk of a housing bubble, a better return on investments, and more products from investors. All of these factors would create a healthy, robust, and long-term strong housing market.
For informational and educational purposes only. Rates and fees are dependent on loan products and qualifications. On Q Financial, Inc., is an Equal Housing Lender. NMLS #5645|AZ-BK 0906866