J.D. Roth's Story
Mortgage rates are rising quickly across the country, which appears to be hurting most property markets. Some have experienced less impact, such as the market in Corvallis. Allow enough time.)
At the beginning of the year, the average mortgage rate for a 30-year loan was around 3.0 percent; today, it is 6.245 percent, even for those with exceptional credit scores of over 800.
Kim and I were lucky to purchase our home in 2021 rather than 2022. The historically low rates were only a perk for buying at the time we did; they weren’t a consideration in our decision-making last year.
When we bought our house last August, we got a $480,000 mortgage with a 2.625 percent interest rate.We missed the exact mortgage market bottom (which occurred in early January 2021, when we could have gotten a loan for 2.5 percent), but we came very close.
The Federal Reserve made the following graph to show how mortgage rates have changed over the past 2.5 years.
Here is a graph showing mortgage rates over the previous 50+ years:
Since the Great Recession of 2007–2009, mortgage rates have remained at historically low levels. Additionally, during the COVID epidemic, rates further decreased. (These low rates are partially to blame for the last two years’ scorchingly hot property market.)
What do higher mortgage rates mean for those who are actually buying homes? Let’s use our circumstances as an example.
Declining Buying Power Due to Rising Rates
Kim and I finalized the purchase of our house in Corvallis last August. It is a 1964 behemoth that cost us $680,000. With a $200,000 down payment, we were able to secure a 30-year loan with a 2.625 percent APR.Each month, we make a principal and interest payment of $1929.33. (Our real monthly mortgage payment, with taxes and insurance included, is $2528.43.)
The cost of that identical loan now would be 6.24 percent. Our monthly payments for principal and interest would be $2956.04 if we were to purchase this same home at the same price with the same down payment, which is an increase of almost $1000 each month compared to when we first purchased it a year ago!
We would have to lower our standards if we were house hunting now and wanted to keep our monthly mortgage payment of $1929.33 the same. We would be looking at a $313,500 mortgage on a $513,500 home rather than a $480,000 mortgage on a $680,000 home.
But hold on! But there’s more! Our ability to purchase homes would be further hampered by the 10% increase in home prices in our community over the previous year. We would be looking at $467,000 homes if we had waited until today to buy and wanted to keep our monthly mortgage payment at $1929.33. Delaying by a year would have resulted in a $213,000—or more than 30%—decline in our purchasing power.
Low mortgage rates undoubtedly offered us an incentive to act swiftly, even though they didn’t motivate us to move last year. However, I’m not sure what we would have done if we had waited until this year. I probably wouldn’t have wanted to get a mortgage since I dislike having to take on a lot of debt. My options would have been considerably more constrained if I had tried to find a house to buy with cash.
I don’t hesitate to carry a mortgage when interest rates are as absurdly low as 2.625 percent. It makes no sense. Every single time I want a mortgage on my house, I never want to pay it off. Although it isn’t free money (and I don’t want to imply that it is), a rate of 2.625 percent is still incredibly affordable. The gap between our mortgage rate (2.625 percent) and the expected long-term stock returns is massive. There is a lot of leeway and space for error there.
However, there is hardly any difference between the anticipated market return of 6.8 percent and the rate of 6.245 percent. There isn’t any room for error. I’m hesitant to borrow money at this rate, let alone for such a significant sum. With interest rates this high, I’d prefer not to have a mortgage.
What Does the Future Hold?
I anticipate that increasing interest rates will have the desired result, which is to temper the scorchingly hot housing market. Will costs decrease? Probably. But who can say? But it’s obvious that something will change.
A few of my pals work as real estate brokers. If you have friends who work as real estate agents, you probably already know that they frequently act like permabulls about their field. They steadfastly believe that housing values will rise in the future. But even my real estate buddies think a change has started.
Here is a long and wise Facebook post from one of my real estate friends:
Although property prices were high last year, they were moderated by extremely low interest rates on mortgages. You now face a double whammy of rising rates and pricing. It feels like a particularly bad time to buy a house right now. That combination is poor.
People that have to relocate immediately make me feel bad. They are being mistreated.