Market Analyst Wolf Richter is warning real estate investors that the line in the sand for real estate may come sooner than expected. Richter, author of the Wolf Street Blog, writes the movement of the average interest rate for a 30-year fixed-rate mortgage with a 20 percent down payment over five percent indicates movement closer to the tipping point for the housing market. Last week’s 5.05 percent interest rate was the highest since January 5, 2010.
Where is the Pain Point?
“This is not likely the pain threshold for the housing market, though it is already putting pressure on it,” Richter continued. He noted potential buyers may feel scared or unable to buy in light of rising monthly payments.
However, mortgage rates may hit six percent by 2020 according to a number of financial advisors. When this happens, Richter warned, a considerable number of buyers will be blocked from the market until prices fall.
In hot markets like Seattle and cities in California, rising rates could take housing affordability completely out of the discussion. The share of income needed to afford a home starts around 50 percent for the average homebuyer in those areas.
Furthermore, homeowners with lower fixed rates may opt out of selling in order to keep their lower payments in place. This could prevent inventory from rising as quickly as some hope in areas with unhealthily low inventory already.
“Affordability issues, already tough to deal with at four percent and 4.5 percent…are much tougher at six percent,” Richter concluded. Rates have not been as high as six percent since December 2008. Although, they ranged between six percent and seven percent for much of the time between 2006 and 2008. Prior to that—in the early 2000s—they were as high as 8.5 percent.
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