We have all heard the news of the Federal interest rate hike of .25% and if you are in the market to buy a home you may be wondering how rising mortgage rates will affect the Los Angeles real estate market.
Firstly, this all needs to be put into perspective. The old adage that “everything that goes up must come down” does not ring true for interest rates, well at least not after they have reached rock bottom. Imagine in 1981 the average mortgage interest rate was 17% reaching as high as 18.45%. At that time the Fed was trying to curb rampant inflation.
Then came the Great Recession and in 2008 the Fed cut interest rates to near zero to attempt to stimulate the economy. What happened to mortgage rates? December 2012 and August 2016 offered the lowest average 30-year fixed mortgage rate on record – 3.36%. And rates only topped an average of 4% once, in 2014, reaching 4.17%. Even then it settled back to 3.86% in December of the same year.
The rise in rates may set off alarms, but let’s remember that they are still historically low! The average interest rate this month is around 4.3%. So let’s do some calculations based on a loan of $250,000.
Monthly principal and interest payments at a rate of 4.3% will be $1,225.49. If that rises another 2% to 4.5% your monthly payments will be $1,285.46, an increase of almost $60 a month.
Back to the suggestion of putting things into perspective, Look at the chart above. Let’s look around the median point, May ’04. The average 30 year fixed rate then was around 6%. That same $250,000 loan then would have cost you $1,521.06, almost $296 more a month.
Is it expected that interest rates will rise to 6% anytime soon? Not likely, some predictions are that it will hover around 4.5% for a while and rise to 5% by the end of 2017. The same $250K loan at 5% would result in payments of $1,361.92 a month, $136 more a month.
Will this scare of prospective home buyers? Maybe some because the increased monthly payments exceeds their comfort level. Or it could possibly affect their ability to qualify for a loan. Might the situation affect home prices? Maybe not immediately. Home prices are generally affected by supply and demand, and in Los Angeles supply is low. If buyers are priced out of the market, and home sales drop then prices will be affected.
So, how will rising mortgage rates affect the L.A. market? As is always the case, if you are ready to buy and can afford it, then buy. If you are ready to sell, then sell. If you try and wait out the market you may always be looking in the rear view mirror
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