Higher Mortgage Rates Making Cheap Money Less Cheap
December 11, 2018
(Industry Intelligence Inc.)
– When my wife and I were in the middle of selling our old home and buying our new one last year, we were astounded by the home prices.
In Southern California’s San Fernando Valley, our little starter home—three bedrooms, one-and-a-half baths, 1,244 square feet—sold in one day (we hadn’t even officially listed the house yet!) for $525,000, compared to our purchase price of $375,000 back in 2010. We needed every penny of those profits, though, as our new home—which granted was much bigger than our old one--cost a pretty penny.
“Why the surge in home prices?” I asked my realtor. His response was simple and explained it all:
“Mortgage prices are low,” he said. “That means there’s lots of cheap money to borrow.”
Fast forward a year, however, and the market has turned. The S&P CoreLogic Case-Shiller 20-city home price index, released last month, rose 5.1% from a year earlier. That's down from a 5.5% yearly gain in the previous month. It was the sixth straight month that home price increases have slowed. Meanwhile, sales are 5.1% lower than they were a year ago and new home sales have fallen for four straight months.
What’s the culprit? Higher mortgage rates. The average rate on a 30-year fixed mortgage was 4.75% last week, according to Freddie Mac, up from 3.94% a year ago.
In other words: Money ain’t so cheap to borrow these days.
Nationwide, a shortage of homes for sale has plagued potential buyers for the past couple of years, but the inventory of unsold homes has crept higher in recent months. Ralph McLaughlin, deputy chief economist at CoreLogic, a real estate data firm, said that is bringing supply and demand more into balance.
Still, "years of price growth outpacing income growth, as well as rising mortgage rates, is making the cost of buying homes increasingly expensive," McLaughlin said.
So the market is still to the benefit of homeowners. It’s just a bit more of a level playing field these days.
Nevin Barich is the Food and Beverage Analyst for Industry Intelligence, which can help YOU better address your own industry challenges. We invite you to come take a look at our service. Call us today at 310-553-0008 and we’ll schedule you for a 15-minute demo.