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Cromford January 2017

With little prospect for a cut in interest rates and the likelihood of further rises, many home buyers could be kicking themselves for not buying in 2016 while they had the chance. As recently as October it was possible to get a 30 year fixed loan at 3.42% according to Freddie Mac’s interest rate survey. Today we are looking at 4.18%.

For a $200,000 loan that translates to a payment of principal & interest of $976 per month. In October that same loan would have cost just $889 a month. This is a rise of almost 10% in a matter of weeks. The purchases prices at price points below $300,000 are still moving north at a brisk pace, so a home purchase in 2017 is likely to be a lot more expensive than it would have been n 2016.

If interest rates continue to climb, as many are forecasting, it is not impossible we could see 5% reached before the end of 2017. That would make the principal & interest payment for a $200,000 loan rise to $1,270. This is a 43% increase from the payment corresponding to a 3.42% rate, and this could potentially be happening in a little over a year.

Millennials are likely to be squealing if this were to happen, and they probably will not take kindly to being reminded by baby boomers that 8% is the long term average rate for a 30-year fixed loan. The monthly payment at 8% is $1,664. Mind you, it was last at 8% in August 2000, so it is easy to forget what it was like.

Economists have been predicting interest rate rises for the last 4 years and each year they have been wrong. It appears that 2017 may possibly be the year in which the forecasts finally come true, but no-one knows that for sure, even Janet Yellen.

Anyone who thinks rising interest rates cause home prices to fall will discover that is a false premise and has never been borne out by historical example. Home prices depend on supply versus demand. Higher interest rates are likely to cause lenders to be more interested in approving loans and a higher approval rate leads to increased demand. The shortage of construction labor is going to put a lid on additional supply, so unless there is an external change (e.g. a massive population shift) non-luxury home prices in Greater Phoenix are likely to continue rising in 2017, especially for the low end and lower mid-ranges up to $300,000.