The ongoing rise in mortgage interest rates doesn’t seem to be having an effect on home sales. Home sales nationwide are increasing even as mortgage rates are starting to climb again.
The interest rate on an average 30-year mortgage rose from 4.61% to 4.83% the week before Christmas according to Freddie Mac. The New York Times is even reporting that mortgage rates could have hit rock bottom in mid November and may climb again for quite some time.
Despite the mortgage rate increases home sales are actually going up. The percentage of first time homebuyers actually increased from 34.2% to 37.2% according to Campbell/Inside Mortgage Finance survey results published in Fortune.
Falling Home Prices Could Be the Cause
The reason home sales are rising, as mortgage rates fall could be a steep decline in home prices. On Dec. 28 CNN reported that house prices in 20 key cities fell by 1.3%. This equals a 15% annualized decline on the S&P/Case-Schiller Index.
The steep fall in house prices has enabled homebuyers to pick up some tremendous bargains even with the rise in mortgage rates. Since it is now a buyer’s market, many sellers could reduce prices to match the increase in mortgage rates.
It must also be noted that mortgage rates are still very low even with the recent increases. Homebuyers with good credit are still getting a very low interest rate and paying less for the house.
Home Sale Increase and Price Decline Could Continue
Even with rising interest rates now could be a very good time to start shopping for a home because prices could continue to fall. Experts are predicting that house prices could fall by as much as 8% in 2011.
Market analysts at Fiserv are predicting that house prices will by 7.1% between June 2010 and 2011, CNN reported. Other experts believe the decline could continue well into the Third Quarter of 2011.
This means that the fall in house values could be several times larger than any increases in the mortgage rates. Even if people pay slightly more for mortgages they will still be paying much less for the entire house.
A wild card in the mix is the foreclosure crisis. Millions of homes are currently off the market because of robo-signing and other legal issues related to foreclosures. When those homes come back on the market, prices could fall farther.
Mortgage Interest Rates Could Increase
Something that anybody who is thinking about buying a home should consider is increasing mortgage rates. If mortgage rates really have hit rock bottom they could start going up.
Mortgage rates would have to go up by several percentage points for mortgage interest costs to exceed the savings from lower home prices. That means that homebuyers in the near future could enjoy lower house payments.
Persons that could buy now could lock in a very low home payment with a lower mortgage interest rate over a 30-year time period. That could be a very good deal if inflation starts affecting mortgage interest.
Public Perception a Big Factor
Another reason why home sales and prices could be falling is public perception. Many potential homebuyers could be waiting to see how far prices fall before they start house hunting.
News stories about falling home prices could be keeping buyers away. Stories about a rise in mortgage rates could persuade some people to buy.
The continued high rate of unemployment and worries about job losses could also be preventing many people from buying. Some individuals simply don’t have the money, while others are putting their cash into savings in anticipation of more economic problems.
This situation could be made worse by news stories about the possibility of a double dip recession. Some economists think the fall in housing prices is a sign of the beginning of the double dip.
Bond Crisis & Mortgages
Another big potential worry is a municipal bond meltdown, which could have as big an effect on the economy as the housing bubble collapse. Some experts including Meredith Whitney believe that a large number of local governments in the US could default on municipal bonds in 2011. Whitney told CBS’s 60 Minutes as much. That could trigger another financial crisis and have other effects on the economy.
These effects could include more unemployment and foreclosures, which could drive home prices down even farther. Another side effect could be drastic cuts in government services that could also affect home prices in some areas.
The most likely effect of all this will be slightly higher rates of home sales but continued decreases of home prices in 2011. This will be accompanied by a modest rise in mortgage rates throughout the year.
For the average person these factors mean that it could be a very good time to buy a home. Both house prices and mortgage rates are low so it could be possible to lock in a very low house payment for the long term.
The only potential drawback is that the fall in house prices could continue for the next year or so. That shouldn’t affect individuals that plan to stay in a home for a long time. Instead it could increase the value of a home as an investment.
For those who can qualify for a mortgage this could be a very good time to buy or at least start house hunting. 2011 could also be a good year for real estate investors to pick up some tremendous bargains.