This is Diana with ABC-The Appraiser’s Business Companion. In the recent couple of weeks there was a rise in the interest rate and its reported that it will be rising again before the end of the year. Freddie Mac reported as of October 11, 2018 “In this week’s survey the 30-year fix-rate mortgage jumped 19 basis points to 4.9 percent. Rates are now at their highest level since the week of April 14, 2011.” Freddie continued to report that “Rising rates paired with high and escalating home prices is putting downward pressure on purchase demand.” The news clip noted that even though the monthly payment continues to remain affordable, the primary hurdle for many borrowers today is the down payment. That required down payment is the reason why home sales have decreased in many of the high-priced markets.
30 yr. Mortgage Rate History 2014-2018
Lenders start with a range of 3%-6% of the price of the home for the down-payment but the closing costs will also be the additional monies needed which can cost on average another 2.5%-3%, in some cases even higher. Consider a dwelling with a sales price of $250,000 that is to be mortgaged over 30 years.
How much will the borrower need to fund the down-payment at 6%? $15,000
How much closing cost will additionally be required (3% of the mortgage) $ 7,050
Total out of pocket for purchase (doesn’t include cost of moving) $21,050
Mortgage at last year’s rate 3.2% over 30 years, mortgage amt. $235,000 $1,016.00 monthly P&I
Current rate of 4.9% Monthly Mortgage P & I same loan amount $1,220.67
Increase in cost of mortgage $ 204.67
The required ratio for qualifying borrowers is most often a 28% ratio which indicates a household borrower income would have to be $4,359.54 monthly income minimum with no other outstanding debts to buy that $250,000 house today. Last year the monthly income would only have to be $3,628.57. Generally speaking the household of $3,628.57 doesn’t expect a raise of $730.97 per month. That means they can’t buy that $250,000 house. The other part of that ratio is 36%, the maximum monthly expenses including the house not cannot exceed 36% in some cases they will raise it to 38%.
How does that relate to the appraiser? Think about your Neighborhood Trends, think about your demographics. If for instance the household income annually is $60,000, that amounts to a $5,000 monthly income. With expenses of the household (utilities, insurance, credit card) there isn’t a lot left over for a large house note.
When you consider the price range of houses and consider the household income, a change in the interest rate can affect significantly the affordability. If the affordability decreases because interest rates rise and toss the borrower into being disqualified for the loan, how much longer does the house have to sit on the market waiting for a qualified buyer?
We are moving into a season where typically there is a slow down on absorption; add to that season the increase in interest rates consider how that may affect the projected marketing time. It will be interesting to watch the housing prices as the interest rates creep up and houses sit for long periods of time. Pay attention to neighborhoods that have seasoned ownership, that’s where you’ll see the first decline in net proceeds to the seller. Don’t take lightly any seller paid concessions. Study the patterns to see if they change since the interest rate has changed. If they have, report what you’ve studied and offer the reasoning behind any change. It may be there’s a slow down because not only is the season ready to settle in, the interest rate hike may make sellers change their mind about selling as they wade through the borrowers offers to buy.
This is Diana Jacob, and you’ve just had a tip of the week from ABC- The Appraiser’s Business Companion.