By Caitlin McCabe
The Philadelphia Inquirer
For the past few weeks, the economy has been pretty confusing. So you’re probably wondering what’s happening with the housing market’s mortgage rates —the one thing that consistently affects how much you pay for a home.
In October, the 30-year fixed mortgage rate jumped past 5 percent for the first time since 2011, creating considerable speculation among market observers that mortgage rates would only go up from there. Then, in December, the rates ticked back down again, hovering at 4.5 percent around Christmas.
It’s difficult to predict where mortgage rates —or the economy —will go, with forecasts and realities changing month to month, or day to day.
Still, most economists expect that mortgage rates will continue to rise throughout the year. The housing website and research company Zillow projects that by the end of 2019, rates will reach 5.8 percent. The National Association of Realtors’ vice president of research has said 5.3 percent. Freddie Mac, meanwhile, has a more conservative estimate, predicting that the 30-year fixed rate will average 5.1 percent in 2019.
But what does that mean for the typical home buyer, who likely doesn’t monitor mortgage rates consistently?
According to one of the latest Zillow reports, rising rates can actually mean a lot.
In a December analysis that studied housing affordability in markets across the nation, Zillow found that mortgage rates can affect buyers’ budgets more than they might think. The higher that mortgage rates rise, Zillow found, the less a buyer can spend on a house and still keep payments affordable.
Consider, for example, a buyer who makes the current U.S. median household income of $61,240 and wants to spend 30 percent of that salary each month on a mortgage payment. In January 2018, when mortgage rates were 4.15 percent, the buyer could have bought a $393,700 home, according to Zillow’s research. Now, with rates hovering around 4.63 percent, a buyer who wanted the same monthly payment could instead afford a $372,000 home — $21,700 less.
If mortgage rates were to rise as high as 6 percent, Zillow found, a buyer would instead have to shop for a $319,200 house to maintain the same affordability, a nearly 19 percent reduction in purchase price from the 4.15 percent mortgage rate of this time last year.
Rising mortgage rates also could have ripple effects across the entire market.
First-time or current buyers, intimidated by the possibility of taking on more expensive debt, could decide to delay or quit their housing search altogether, said Skylar Olsen, director of economic research and outreach at Zillow. Homeowners would, as a result, stay in their current properties, reducing the number of available homes on the market. Generally, a housing market is considered healthy when homeowners are trading up, thereby freeing up housing for different subsets of buyers. When current starter-home owners, for example, do not move on to larger homes, it’s harder for first-time buyers to get into the market.