Inflation isn’t rising and the job market, while doing better, is creating just enough jobs to keep up with population growth. So why are rates rising?
You can blame Ben Bernanke.
At least that’s how investors have (over)reacted to the Federal Reserve Board Chairman’s June 19 statement that “the downside risks to the outlook for the economy and the labor market have diminished.”For several years now, the central bank has kept interest rates super-low by buying up billions of dollars worth of bonds. Ideally this helps the economy grow by encouraging businesses and consumers to borrow and spend more. And even though Bernanke also said there would be no immediate change in the central bank’s easy money policy, Wall Street investors figured the moment is near for the Fed to start closing up its efforts to support the economy.
In the real world, that translated to a nationwide average rate leap for a 30-year mortgage to 4.46 percent from 3.93 percent in late June— the biggest one-week increase since 1987 and the highest rate since July 2011, according to the Federal Home Loan Mortgage Corp.
For local home buyers, many of whom have struggled since the Great Recession and credit crisis to qualify for mortgages, this uptick in rates cuts into their buying power.
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 increase to 5 percent, buyers hoping to get that same $900 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.
And, over the 30-year life of that $200,000 mortgage, a home buyer would pay an additional $63,000 in interest with a 5 percent rate — $63,000 not available for spending within the community on consumer goods or services.
The speed of this change is rattling the healing housing market, but there’s no reason to hit the panic button just yet. Rising rates should just be considered a nudge for would-be buyers to act – as they seek to lock in deals before rates increase further. And in housing, as elsewhere in the economy, real interest rates are still very low by historical standards.
