I generally don't word titles as strongly as that... But this is important.
Interest Rates on Mortages NEED to Rise...
It isn't that we want them to rise, it is that the underlying structure is going to force rates higher. Here are the things contributing to that coming increases...
- The Government will be borrowing more than a Trillion Dollars this year... and next year... and likely the year after that.
- China is not able to buy as much of our debt as they have in the past.
- The Federal Reserve Bank is pretty much out of options to push down rates... the Fed Funds Rate is already near 0%.
The Congressional Budget Office stated that the massive borrowing for the new "Recovery" package will force out private borrowers. Basically, mortgage borrowers will need to compete with the government for investor dollars. At the same time, many of the big investors are backing out of the market because of their own economic ills... China being the biggest of those investors. Frankly, there aren't that many ways to raise a trillion dollars.
So, just as supply and demand affects everything else, it affects mortgage rates. The supply of money is bocoming tighter, and the demand for the same money is becoming greater. When the demand starts outstripping supply, prices (rates) HAVE to go up.
There are two big things that go into the monthly carrying cost of a home... Principle and interest. Just to give a couple of examples...
- A $250,000 property, with 10% down and an interest rate of 5% makes the payments about $1207/mo. (not including tax, insurance, PMI).
- A $225,000 property, 10% down and an interest rate of 8% makes the payment about $1485/mo.. It isn't that long ago that an 8% rate was pretty good.
- If the price were to drop to $200,000, 10% down and a 14% rate... well below the peak set because of "Carter-nomics"... the monthly cost of principle and interest would be about $2133.
So, even with a 10% or 20% drop in housing prices, we could be looking at dramatically higher housing costs.
"I'll just rent..."
Let's look back at supply and demand again... If fewer people can afford to buy homes, and the cost of carrying a home is going up, rental costs will rise at the same time. For the last several years, rents have been kept in check because of the ease of buying a home. Basically, the landlords couldn't jack rents because anyone could get a house. If that is more difficult, landlords would be free to jack rents... Currently, there is overhead inventory on rentals, but now construction is stopping on rentals, too. That means that inventories won't be increasing going forward.
Is there danger in committing to a home right now? Absolutely. And there is a danger in NOT doing so as well. Of course, if you are a cash buyer, then there are reasons to wait if the economy continues to slow. If you are going to be seeking a mortgage, and you are in a position to get approved... I think there is less danger to worry about.