It probably seems obvious that as interest rates increase, the demand for housing will slow. In September of 2013, home prices rose by just over 13% when compared with 2012, but it was a double-edged sword, because growth slowed in many cities.
What Does This Mean to the Average Homeowner?
Rising property values mean that property owners who are currently over-mortgaged (i.e. they owe more than their homes are actually worth) have some hope of regaining equity in their homes. To the potential homeowner, however, it means that housing has become less affordable.
Mortgage rates have, obviously, increased along with interest rates. Homebuyers are cautious, in many cases preferring the “wait and see approach,” hoping for a decline in interest rates. This has also led to a decrease in enthusiasm on the part of people who might otherwise be interested in “house flipping” – buying a distressed property, fixing it up, and selling it at a profit. Many potential buyers could find it difficult to qualify for a mortgage.
Is This Because of the Crash of 2009?
Yes. The real estate market has recovered somewhat, but seems to have stalled. Many economists believe that it will take a fair bit of time until the housing market fully recovers from the crash of 2009.
Experts believed that very low mortgage rates combined with a rise in prices and increased consumer demand would rejuvenate the industry, and this has happened to a certain extent. According to CoreLogic, the number of homes that have been lost to foreclosure dropped by 39% in September of 2013, compared with the previous year. Late mortgage payments are less common. However, home purchases are on the downswing.
Why Are Fewer People Buying Homes?
Most experts say that home buying is dropping because mortgage rates are rising, having taken a jump of a full percentage point in the spring of 2013. They fell a bit, but most analysts don’t believe that they will return to significantly low levels anytime soon.
What Caused Mortgage Rates to Go Up?
In the early part of 2013, the central bank helped to reduce interest rates by purchasing $85 billion per month in mortgage-backed securities and government bonds. In the spring, officials began to think that the economy was becoming strong enough that they could abandon that program over a period of time. This alarmed investors, and consequently the stock market plummeted and interest rates rose.
Is It All Gloom and Doom?
Not necessarily. Some economists believe that the housing market is just hitting a few bumps, and there will be recovery in the long term. Consumers are beginning to spend a bit more, the unemployment rate has decreased, and interest rates are beginning to moderate. These are all positive indicators for a recovery in real estate.
Housing could continue to be a vital part of a healthy national economy, but it probably isn’t realistic to expect the huge gains that many forecasters predicted.