By Craig Erwin, Ph.D.
The average mortgage rate just topped 4% for the first time since 2019. Rates were only 3.22% when 2022 started. The Federal Reserve (the U.S. central bank) is highly likely to push short term interest rates higher. A 1% rise in interest rates results in a roughly $100 higher house payment, so rising interest rates can quickly put homes out of reach for prospective buyers. The highest rate in recent history was 16.63% in 1981, shockingly high compared to today’s rates. So, even though interest rates have risen rapidly this year in comparison to what we have experienced in recent years,, they are still far lower than rates in 1981. If we were to see double digit interest rates again, we would have all kinds of trouble, and not just with housing.
If you can afford the payments, it’s still a good time to buy a house because interest rates are still attractive compared to historical rates. But the problem today is that inventory is so low that buying a house may be very challenging. Even if you can find a suitable house, it is almost certain that other buyers will also be interested in it, and at least some of the buyers may be willing to pay more than the list price (some much more than the list price). So, even though interest rates are still attractive, buying a house is no slam dunk. If interest rates are very low, inventory is likely to be low, but if interest rates are very high, inventory may also be high. Sometimes it seems like you just can’t win.
Have you bought a house recently? If so, were you involved in a bidding war? As the Federal Reserve raises interest rates, how do you expect to be affected?
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