Rising interest rates may not be too bad for homeowners

(CNN) — With interest rates starting to climb in the United States, many are wondering what it could mean for homeowners. As home ownership rates continue to decline, sales are down, the Dow is…

Rising interest rates may not be too bad for homeowners

(CNN) — With interest rates starting to climb in the United States, many are wondering what it could mean for homeowners.

As home ownership rates continue to decline, sales are down, the Dow is at record highs and a range of economic reports have showed the US economy has brightened, many have become concerned that more people will move out on their own and the financial strength of the nation will be in jeopardy.

For this reason, there has been widespread concern that when rates begin to rise, they will fall back, bringing down the value of homes significantly. But there are actually some indicators that, at least for the time being, interest rates do not appear to be doing much of a dent in the nation’s housing market.

When rates do eventually rise, they are expected to do so gradually. There has been little evidence of the level of buying they normally have done with the booming economy, according to Scott Grannis, chief economist at Pacific Investment Management Co. (PIMCO). Rates are already at or near 4%.

Housing is the typical indicator of economic activity, but when interest rates are still historically low, they may not necessarily be influencing sales as much as they did before. Prices appear to be holding up. And even if interest rates do climb enough to throw the American housing market into a steep decline, it is not likely to be as damaging as many expect.

Brent White of CoreLogic, which analyzed properties in 11 major metropolitan areas in the United States, said they don’t show a downturn of housing prices yet.

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“No market is as sensitive to interest rates as the West Coast,” White said. “These markets have experienced the big jump, but the increases are relatively limited. For the most part, interest rates have not been a big threat for the overall market.”

There is a lot of speculation about what impact rising interest rates will have on the housing market when rates reach 6%, but that does not appear to be in the cards anytime soon.

Without financing from conventional loans or from mortgages backed by the Federal Housing Administration, many first-time homebuyers struggle to get a loan. Lenders often require a down payment of at least 20%, and even private-label lenders might not lend to those who can’t afford to put up that much.

When rates hit 4%, lenders are also loath to lend to those with a credit score of less than 620, which many individuals cannot meet, and the ability to buy is typically restricted to those with good credit.

As the interest rate rise, mortgages are also likely to become more expensive, and there could be a slowdown in the demand for the most costly mortgages that are offered, like jumbo loans — those higher than prime loans but larger than the home equity loan.

And if rates do climb and interest rates continue to climb, then that means first-time homebuyers might have a tougher time getting a loan.

So, if rates are indeed the indicator for the housing market, then the good news is that there is little evidence of negative impact.

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