Interest Rates Begin to Rise as Expected

For the past months I have been advising/forecasting the potential rise in mortgage interest rates. Based on the activity of the markets coupled with the Federal Reserve mandate most agreed Federal Reserve interest rates would in fact rise by December 2016 and thus impact mortgages.

Well, what a difference an election can make!

Posted on #Bloomberg News a few hours ago there has been a spike in mortgage rates: Spike in Mortgage Rates Throws Wrench into US Housing Market

We have all witnessed the increase in investment interest rates tied to the 10-Year Treasury Notes. While not getting too technical usually mortgage interest rates follow in tandem. In addition bonds from Germany, Japan and Switzerland which were in negative interest rate yields have since gone positive signaling the possibility of inflation on the horizon.

As an experienced real estate broker and one who has witnessed such cycles, now is not the time to panic or worse make a short-sighted decision; sellers and buyers have to keep the following in mind:

Rates Still At Historic Lows: even at 4 to 5% interest rates are still at historic lows. Some would argue including myself the record in home resale prices in the Denver metro area can be somewhat attributed to the low cost of borrowing also known as buy a payment regardless of the underlying value.

Some Inflation is Positive: The Federal Reserve desires a 2% inflation rate. While inflation can be a frightening term it is preferable to deflation/stagnation and recession which continues to be an issue in Japan and parts of Europe.

Time-Frame: If you plan to hold your purchase for 3-5 years and beyond with a fixed mortgage most likely interest rates will be of limited effect especially if within a conforming loan which is Denver is presently at $468,000.

Higher interest rates do in fact reduce affordability i.e. higher cost of borrowing/debt service.

Yet during periods of interest rate hikes, housing prices may remain stable or trend downward to compensate for the increased cost of borrowing.

The reality is we have been in a low-interest rate environment for way too long and some inflation may be expected and desired to balance growth and avoid another speculative bubble or similar.

My prediction is housing demand in metro Denver will slowly cool off. I believe in the upper-end of the market the pinnacle was reached during the early Spring of 2016 and since prices and demand have fallen off. I believe the rest of the market will begin to adjust to the reality of potentially higher rates and seasonal slowdown. At present the average annual income in Denver is already stretched concerning average sales price.

What will be interesting is Spring 2017. No one knows where interest rates or the economy will be. We have been in a long expansion coming from the depths of a serious recession. A cooling off is not to be unexpected and I believe welcoming as we do not wish for a repeat of the early 2000’s i.e. speculation, sub-prime mortgages and low down-payment products.

We have witnessed rental rates slowly drop due to increased supply and reduced demand. On the upper-end of the sales market prices seem to have leveled coupled with longer days on market and price reductions. Construction costs once rising seem to be leveling off as well.

Interest rates are just one indicator of the economy. It is important to look at the bigger picture, longer-term horizon and assessing the various scenarios concerning housing over the next few quarters. Historically housing matched inflation; only within the last generation have we witnessed housing as an investment vehicle and one that has outpaced inflation. Assuming business cycles have not ended, nothing to fear, just plan accordingly.