Many Boca Raton homeowners figure they’ll hold onto their homes because prices have been on a steady rise. However, those price gains are heavily based on two market variables: 1) a current shortage of housing inventory and 2) continued low mortgage rates.
Lower rates mean more house
It is a given that if mortgage rates are low, as they are now, that home buyers can afford more house. On a house priced at $250,000, at 20% down, borrowers at 3.92% (today’s advertised rate) are making monthly payments of $913. This payment does not include taxes or HOA fees.
However, if that rate rises to 4.5%, which is where predictions are for December, that rate rises by more than 10% to $1013 per month. Again, this does not include taxes or HOA fees.
Since there are very few Boca Raton homes in a price range this low, chances are good that any home that comes to market will require an even higher monthly payment amount.
20% down is very unusual. 3.5% is typical. Payments are higher.
In addition, it is very unusual for buyers to put down 20%. Most buyers, especially first time buyers, are likely to use an FHA mortgage with a down payment of 3.5%.
So, using current mortgage rates, consider a $400,000 home (relatively modest by Boca Raton house price standards) at 3.92%. That’s a monthly principal and interest payment of $2543. Add another $160 or to that for Private Mortgage Insurance (PMI). Plus taxes and HOA fees.
Take that same $400,000 house at a 4.5% interest rate and you’ve moved all the way up to $2738 per month, plus PMI. Plus taxes and HOA fees.
Suddenly, the numbers are looking more difficult to meet each month. That means homeowners who are counting on a windfall, based on continually rising prices, may find that they are disappointed.
Higher mortgage rates mean less house…
That is because when rates rise, buyers are pushed down in terms of what they can ultimately afford. An income of $100,000 can only go as far as the FHA or FannieMae income to expense ratios will allow.
By that same measurement, it may still be an excellent time to purchase a new home. Why? Because money is still cheap at 4%. Even if mortgage rates move up another point to 5%, that is still a relatively low borrowing cost.From the late 1960s to around 2000, mortgage rates rarely fell below 7%. In the 1980s, rates were running at 10% or higher.
And more competition in the marketplace
If interest rates go up half a percent, it is not likely that the bottom will fall out from under home prices. Other than during the years of the last housing bust, we rarely, if ever, have seen the price of single family homes drop precipitously.
Instead that interest rise may push more homes into the market.
That may seem contrary to logic, but it makes sense. As interest rates rise, home prices will have to fall. As this shift takes please, homeowners who are holding back will see that there is no more room at the top.
Owners need to sell before supply outstrips demand
If they want to sell at current highest prices, they need to put their homes into the marketplace before there is an over-supply. Equilibrium is considered a 6 month supply, at which point neither buyers nor sellers have any particular advantage. Because there are enough homes to go around to meet demand.
But as mortgage rates rise, fewer buyers will be able to pay today’s higher prices. As owners see the party coming to an end, they are likely to try to get the best price they can before prices start falling due to oversupply.
As has happened many times in the past, the supply of homes arriving on the market may outpace the demand for homes. At that point, competition heats up and prices start to come down to more reasonable levels.
Two powerful market forces that will impact future prices.
There are two other very important market forces at work that will influence prices once mortgage rates rise.
The first is income levels.
According to the Labor Department, the manufacturing and oil sectors of the economy are slowing. A mere 142,000 jobs were created in September, far below the hoped for pace of 200,000 per month. While unemployment figures may be sitting at 5.1%, percentage of the population that is working or seeking work is at its lowest in 38 years.
The second factor is the baby boomer generation.
Another very important item to take into account when thinking about the housing market is the baby boomer generation. Those are our current or soon to be senior citizens, all born between 1946 and 1964.
Every day, 10,000 of members of this group are retiring, all over the country, and many of them own homes that they have outgrown. Many will need to sell those homes in order to have sufficient income to live out their lives.
In short, there are likely to be more homes for sale when interest rates begin their rise. If you want to sell your Boca Raton house, expect to see a return to price negotiations. If you’re going to buy a home in Boca, expect to be able to (finally) negotiate with a seller on price.
Thinking of selling a house in Boca Raton? Buying a house in Boca Raton?
Call us at 561-213-6139
Marc Jablon, the Jablon Team
Re/Max Complete Solutions