Rising Mortgage Rates Eroding Affordability

Mortgage rates have been rising for the last 2 weeks. Rates are more than 1% higher than their lowest level. For example, we had seen conforming loans as low as 4.375% for a 30-yr fixed. This past week, they had been hovering in the high 5% range.

How has this change impacted borrowers? Well, many refinance clients who were trying to time the "lowest" market or were hoping for even lower rates (aka below 4%) are now jittery. Did they miss the boat? Maybe. While we may see some improvements in the coming months, it is unlikely that we'll see the same low level of rates that we had seen earlier this year. According to the latest news from the Fed, it doesn't sound like they are ready to purchase additional mortgage-backed securities. With Fed's buying winding down and more investors coming into the market, they will sure demand higher returns than a mere 4% on a 30-yr securities.

What about the home buyers who have been sitting on the fence waiting for the price to drop more and rates to go down further? What has happened in the last 2 weeks in the mortgage market should be a good reminder of the corrolation between home price and mortgage rates. Here's the numerical comparison: 1% increase in rates is equivalent to around 15% change in purchase price. So, here's the question: Rates can go up by 1% in a matter of days, based on what we have seen. How likely are the home prices to go down by 15% in a matter of days? The reality is that the rapid rising rates are eroding the affordability of home ownership. So, for all those buyers out who need to buy a new home this year, remember to focus on the big picture. The long term financing costs outweigh the cost of the purchase many folds.