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The Impact of Rising Mortgage Rates

Laurence Yun, Realtor.com
From Laurence Yun, Chief Economist at Realtor.com: “Mortgage rates will be starting to rise from this week on. From the 3.9 to 4.0 percent average rate in the past five months on a 30-year fixed mortgage, the new rates will soon be in the range of 4.3 to 4.6 percent. Usually the initial phase of rising rates can quicken the decision to sign on the dotted line as consumers do not want to face even higher mortgage rates later on. However, a prolonged increase will shrink the pool of eligible home buyers.
Here are some raw statistics to contend with. Let’s say a person is committed to paying at most $1,000 per month in principal and interest to be comfortably within this person’s budget. A mortgage calculator will spit out that at a 3.9 percent rate (last week’s rate), this homebuyer will be able to take out $212,000 in mortgage amount. At 4.5 percent (near future rate), the figure drops to $198,000, or the equivalent to a drop of 7 percent in purchasing power. The homebuyer therefore has to shoot for lower price points.
Another way to view the impact of rising rates is to compute the income required to get the $212,000 in mortgage funds as in the above example. At 3.9 percent, the income would have to be $4,000 per month, assuming that this particular person only feels comfortable with a mortgage payment taking up 25 percent of his or her income. At 4.5 percent, the mortgage payment to buy that same home would be $1,074 per month and the corresponding monthly income requirement would be $4,296. Now, how many people have a monthly income between $4,000 and $4,296 or on an annual basis between $48,000 and $51,552? According to the Census income distribution table, 2.9 percent of the population is between these two incomes. This income gap also represents how many people would have qualified to buy this particular example home before and after the mortgage rate change[….]”
Read the entire post at: http://economistsoutlook.blogs.realtor.org/2012/03/16/the-impact-of-rising-mortgage-rates/

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