Anyone who’s been watching home mortgage interest rates over the last few years has probably been waiting for the inevitable reversal of good fortune. After all – rates can’t stay in under-5 or even under-4 percent territory forever can they?
As one Forbes writer puts it, “Economists have been forecasting a rise in mortgage interest rates for so long now that it’s almost hard to take them seriously.” It’s sort of like the economist who cried wolf when you think about it.
Regular consumers are on interest rate rise watch, too.
According to the latest Fannie Mae Monthly National Housing survey, the number of respondents who think rates will go up in the next 12 months rose 1 percentage point to 51 percent. That’s more than half, while 35 percent predicted that rates will stay the same, and just 5 percent said they think rates will go even lower.
Consumers Not Always Right about Rates
It’s worth nothing that consumers are eternal pessemists. When the same survey question was asked one year ago, 54 percent of people thought the rates would rise, yet here we are still waiting. As of late August, rates are back below 4 percent once again, despite all the warnings from experts about the rising rates to come.
It’s understandable that so few consumers expect that the rate will drop lower than it is now, given that we’re already at historic lows. In fact, you could say that what’s been happening over the last two years is really an anomaly when you review interest rates from the last couple of decades.
As far as the experts go, they’re still hedging their bets that rates will rise by the end of 2015. They do, however, have one big factor that makes the prediction more likely to come to fruition, and that’s the Fed’s plan to increase short-term rates later this year from the near-zero levels they’ve been since 2008.
Given the volatility in the world market, though, the Fed’s action is no longer a given. As explained by Zillow researchers, global events over the past year have repeatedly pushed interest rates back down, moving expectations for the first rate hike further into the future. Should the current downturn in China continue, it’s quite possible that rates won’t move all that much, contrary to most experts’ forecasts from earlier in the year. If the Fed rate increase does end up moving forward as planned, however, it could indirectly effect mortgage rates since short-term rate changes tend to have a ripple affect.
Rising Rates Shrink Buying Power
So what say you? Do you agree with the 51 percent of fellow consumers who think mortgage interest rates will climb in the next 12 months? If so, and you’re considering a home purchase, you might want to ramp up your real estate plans. Consider this: Just a 1% increase in mortgage interest rates means an 11% drop in buying power. In other words, higher rates will mean higher monthly payments, and essentially, not being able to afford as much house as you can right now.
This is even more true if you’re considering higher priced homes in which a rate fluctuation has a greater impact. In West Coast cities and other metro areas which tend to have pricier homes, for example, a rate jump from 4% to 5% could push a lot of potential buyers right out of the market.
Will our low interest rate holiday finally come to end before we turn the calendar to 2016? Just a little over half of people think so. One thing’s for sure for prospective home buyers – the longer you wait, the bigger the gamble you’re taking.
Dawn Papandrea is a Staten Island, NY-based freelance writer who specializes in personal finance, parenting, and lifestyle topics. Her work has appeared in Family Circle, WomansDay.com, Parents, CreditCards.com, and more. Visit Dawn on her website.