A recent, sharp rise in mortgage-interest rates has raised concerns about whether the housing recovery will soften as home loans become more expensive.
Two weeks ago, the average rate nationwide for a 30-year mortgage jumped to 4.46 percent from 3.93 percent — the biggest one-week increase since 1987 and the highest rate since July 2011, according to the Federal Home Loan Mortgage Corp.
“We do think that, as rates go higher, there will be additional affordability issues,” said Brad Hunter, a Florida-based economist for the real-estate research firm MetroStudy Inc.
“Everyone is getting nervous now as the Fed is taking away the Kool-Aid bowl soon,” he said. Rates started moving up after the Federal Reserve said on June 19 that it might end its economic-stimulation program by the end of this year or in 2014.
An increase in interest rates could temper the housing recovery in several ways.
For one thing, higher rates would mean prospective buyers could afford less house, possibly easing demand for new and existing homes. For another, the equity funds that have been buying up foreclosures would likely go looking elsewhere for better ways to invest their money, which would likely limit competition for new listings. Home builders may be pressured by higher carrying costs, even as fewer prospects show up to tour their model units. And homeowners not interested in selling would be less likely to refinance their existing loans.
Here’s a closer look at how rising rates could affect those four groups:
Buyers : For home buyers, many of whom have struggled since the Great Recession and global credit crisis to qualify for mortgages, an uptick in rates would also cut into their buying power once they were approved for a loan.
For example, buyers who obtained a $200,000 mortgage when interest rates were about 3.5 percent in April landed a monthly payment of about $900. But if rates head north to 5 percent, buyers hoping to get that same monthly payment would have to limit their mortgage to $170,000 — or $30,000 less than they could have afforded with the lower loan rate.
In a talk to Congress last month, Fed Chairman Ben Bernanke noted that housing’s vital role in the nation’s economic recovery is due partly to the real estate-related jobs it creates “but also because higher house prices increase consumer wealth and promote consumer spending.”
Over the 30-year life of a $200,000 mortgage, however, a home buyer would pay an additional $63,000 in interest with a 5 percent rate than with a 3.5 percent rate — money not available for spending on consumer goods or services.
And even though mortgage lenders stand to earn more money with higher rates of return on their loans, borrowers would not find it easier to qualify for home loans should interest rates keep rising, said Rob Nunziata, president of Orlando, Fla.-based FBC Mortgage LLC.