These were Brenda’s excuses:
- I need housing prices to fall before I buy
- I want to save more money for my down payment
- I think interest rates will drop some more
Brenda is one of my clients. She used to say those things until she watched a recent piece on CNBC. Brenda was shocked by what she heard on the show, so she called me up and asked me the following: “Princess, you know I’ve been sitting on the fence about buying a house, right?”
“Yes,” I said.
Brenda continued: “Okay, I just saw on CNBC that home prices have gone up. Is that true? You know, I thought they might come down some more because of the economy. Am I too late?”
What Brenda saw on CNBC was right: home prices have gone up. According to the National Association of Realtors and several other firms that monitor home sales, the trend is expected to continue.
In addition to the increase in home prices, interest rates are up too. And wherever interest rates go, mortgages rates tend to follow.
Overall, this is excellent news for the economy. Rising interest rates indicate a healthy economy. However, this is unwelcome news for homebuyers and even some renters.
Here is a basic summary of the relationship between interest rates and the economy:
- A slowing economy often leads to low interest rates
- A growing economy leads to high interest rates
The Federal Reserve raises interest rates to reduce inflation and slow down economic growth. Inflation occurs when the prices of goods and services increase over a period of time. The government wants to control inflation because when prices rise, buying slows. In other words, we buy less stuff. When we buy less, the economy becomes weak. The good news is we don’t need to worry about that now because our economy is growing.
So what does all of this have to do with housing prices and mortgage rates?
As the economy grows, it should become stronger. A strong economy results in the following:
- Higher real estate and home prices
- Higher rents
- Higher mortgage rates
In layman’s terms, if you’ve been sitting on the fence waiting to buy a house like Brenda has, you’ll pay more for the house and more for your mortgage if you finance it. Freddie Mac has reported that the most common mortgage — the 30-year, fixed-rate mortgage — increased by .22 percentage points to 3.81 percent, although that’s not too distressing for now. That increase only amounts to about $20 more in monthly mortgage payments on a $100,000 loan. However, homebuyers should remember not to sit on the sidelines for too long. As our economy continues to grow, interest rates will also continue to grow, which will lead to higher rates for homes and mortgage interest rates.
Now that you know how much the interest rate hike will actually cost you if you wait, and that housing prices are not likely to fall any time soon, what will you do? Will you sit on the sidelines and wait, or go shopping for a home while rates are still at historic lows?
The information in this article is provided for education and informational purposes only, without any express or implied warranty of any kind, including warranties of accuracy, completeness or fitness for any particular purpose. The information in this article is not intended to be and does not constitute financial or any other advice. The information in this article is general in nature and is not specific to you the user or anyone else.