According to some financial analysts, such as Jim Cramer, rising mortgage rates could start to affect consumer spending, house purchases and company earnings in the near future. Cramer recently said on TV that 5% mortgage rates are coming soon. As of the first week of November 2018, the 30-year fixed mortgage rate was 4.85%. A year ago, the rate was only 3.88% for the same type of mortgage.
Cramer has been especially critical of the Federal Reserve, noting that the central bank is not noting that the economy is slowing, especially in areas related to housing. The Fed has raised its key interest rate three times this year, and another increase is expected at the end of the year. But is the end of the housing boom in sight because of higher interest rates? Some experts argue that this is not true. Here are their common arguments:
#1 The Economy Is Stronger
The reason that mortgage interest rates are going higher is largely due to a stronger economy. As the stock market improves, wages go up and house prices climb, the overall economy gets better. It is natural for mortgage interest rates to go higher in this environment. People have more money in their pockets, have more and better paying jobs, and are more able to withstand the higher interest rates.
If we look back to the last housing boom in 2006, rates were even higher – around 6.5% before the decline happened. When the economy is showing strength and unemployment is low, people can pay higher rates for their mortgages.
#2 Higher Rates Will Cause Only Some Buyers to Delay Their Purchase
According to a recent survey published by CNBC, if rates go up to 5% for the 30-year fixed rate mortgage, approximately 25% of today’s buyers would slow their plans. This was according to a survey of 4,000 consumers at Redfin.com. Only 6% said they would stop plans to buy altogether. And 1/5 of consumers said the 5% rates would actually cause them to move faster to buy a home. Another 1/5 said they would think about more affordable areas or buy a smaller house.
So, if the 5% barrier is broken soon, it will not lead to most buyers not buying a home.
#3 Tax Law Changes Have Higher Impact Than Rates
While many people think the interest, rate is the only determining factor in home purchases, there are other factors. One of them is tax laws. Today, the deduction on property taxes is only $10,000. This does not affect home buyers in most parts of the country, but it will have an impact on buyers in high priced markets.
#4 There Are Signs That Housing Demand Is Still Strong
If the threat of 5% rates were having a very negative effect on the housing market, we would be seeing stronger signs of it. According to Redfin’s top economist, Nela Richardson, we are still seeing tight credit, lack of inventory and high demand. These facts indicate there is still plenty of need and demand for housing even with higher rates. There appear to be many more buyers than the housing supply at present can satisfy.
Lenders must be stricter today with giving credit to buy homes. They must show that the buyer has the ability to pay the loan. Because of this, there is pent up demand for credit and housing, in turn, despite higher rates.
#5 ARMs Still an Option
If you want to get a lower interest rate, and are willing to accept some risk, you can always go for an ARM or adjustable rate mortgage. These loans can be obtained in the range of 4.5% for a fixed term of 1, 3, 5, 7 or even 10 years. Getting an ARM can help to really lower the cost of your monthly mortgage payment.
#6 Unemployment Is Low
Unemployment is in the range of 3.7% and has not been that low in decades. People who want to find work can generally do so. Thus, people are better able to afford higher payments. Wage growth also has been substantial in the past year.
So, all is not lost, despite what some naysayers are proclaiming, such as Jim Cramer.