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4.5% Interest Rates Hurt Housing

Doubt - A Despair Demotivator

In the last two weeks we’ve seen interest rates on 30 year fixed mortgages move from 4.5% to 5.5% (or higher) that’s a big OUCH.  This full interest rate point swing has meant that almost overnight, buyers lost well over 10% of their buying power.  Another way to look at it is housing just got 10% more expensive.

While everyone was thrilled to see 4.5% interest rates, myself included, from the very outset I had concern about what this means for housing long term.

The short term benefits are large and obvious:

  • Huge surge in refinancing and purchases
  • Large demand for housing has helped stabilize housing (to some extent)
  • Housing affordability hit new highs
  • Buyers and refinancers locked in phenomenal rates (and most did 30yr fixed mortgages)

The long term drawbacks are also large and ominous:

  • We may have set an artificial price floor on housing: now that it is suddenly so much more “expensive” from a payment basis, will there be even further pressure on prices?
  • Buyers who didn’t lock (I know several personally) got hit over the side of the head by the huge (and quick) run-up in rates
  • A lot of buyers will sit on the fence hoping that rates fall down again (which they may or may not)
  • Homeowners who locked in a 4.5% rate will never want to move. ever.  I predict that many of these homeowners will be far more hesitant to move in the future, thus lowering housing sales in the years to come.
  • Sub-5% now becomes the magic number which buyers think they can get (or should get) since it was available for a few months.  This means historical rates in the 6% & 7% range will look horrible.  They won’t remember that these record low rates were during the worst economic downturn since the Great Depression… they’ll just remember that they were available.

Who knows what tomorrow will bring, but I will be interested to see what happens to our Pending Sales numbers in the weeks & months to come.

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This website is a service of Aaron Dickinson of Edina Realty, a broker Participant of the Regional Multiple Listing Service of Minnesota, Inc.