Real estate and mortgages are co-dependent and though other factors impact prices and sales rates, none probably more than the ability of buyers to borrow money. So this week we’re looking at whether impending increases in interest rates will do any serious damage to what is now a hot market in San Diego and other parts of California.
One factor keeping prices rising has been a limited inventory of properties. Bidding wars are common as anxious buyers pounce on every appealing property that comes on. Once word is out that rates are on the rise, there will surely be a dampening effect on potential sellers as well as buyers.
If you’re in a property with a low interest rate and are thinking about trading up, you might pause before you put your house up for sale and give up that low rate. Your next house may cost just a wee bit too much and we may see general inventory numbers take a further downturn.
After 2006 when the rate on a 30-year fixed rate mortgage was almost 7 percent the Fed lowered the federal funds rate, and it has been at or near 0 percent since 2008. This has caused rates to swoop down into the 3-4 percent range, and revitalize the distressed real estate market, bringing prices to their current highs.
Can this last? Probably not. It is expected that the Fed will be raising a key interest rate, possibly in fall 2015. Will this bump up rates for mortgages? With the opportunity to spread their wings, we think a raise in rates is pretty much a no-brainer. The question is, how high? And how much will the higher rates lower prices?
Most borrowers still put their trust in the 30-year fixed rate, but with interest rates rising, and wages flat, the greater problem may lie in qualification requirements. The higher payouts may just put loans out of reach for many still wanting to buy. And this, inevitably, will have to drive prices down.
If inventory is low though, the more qualified buyers may gobble up the scant inventory, with the less qualified now turning to adjustable rate loans, or using cash to buy down interest rates.
Realtors are loving the current climate with low interest rates, and lots of competition on properties. And, in spite of concerns over drought and other climate factors, markets in California have been particularly strong. Los Angeles values grew 2.6 percent with a median price of over $500,000; San Francisco prices are up 11 percent this year to a healthy number over $750,000. And in our own San Diego, inventory has dropped 49 percent in the lowest price categories, 29 percent for mod-priced homes and 20 percent for the priciest.
So let us relax. Yes, it’s a mixed bag. Interest rates will go up, and price growth may ease a bit, but it doesn’t look like anything drastic is afoot. Just a regular adjustment in the ever-fluctuating world of real estate.
