Today the average 30 yr fixed rate mortgage sits at about 6.5% up from 5.5% in July 2005. While this is a meaningful jump, we are still far below the 8.5% rates we saw in 2000 just 6 short years ago.
I think it's important to see what a 1% jump in interest rates does to housing affordability. Let's do some scenario analysis -
Assume that a buyer buys a home priced at the national median of $220k and puts 20% down - I know, I know, stop laughing "no one puts 20% down anymore" - just bear with me.
This $174k mortgage at 5.5% in July 2005 produced a monthly payment of just $991 and total interest over the life of the loan of $183k. Today that same loan costs $1,100/mth and produces total interest costs of $223k over the life of the loan. In order to maintain the original $991 payment at today's interest rates you would only be able to afford a $156k loan - roughly a 10% decline in the price. Not a huge swing but clearly indicative of what's happened in the market in the last 9 mths.
Where this exercise can really get entertaining is with large mortgages. Let's say someone pays $625k for a home and again (humor me) puts 20% down yielding a $500k mortgage.
At 5.5%, the monthly payment for this mortgage is $2, 850.
At 6.5%, the monthly payment for this mortgage is $3,170 ($320 increase)
At 8.25% - just 1.75% from current rates - the payment is $3,758 (a $908 increase/mth).
If interest rates were to reach 8.25% again, the price of our example home would have to be lowered $474k (again with 20% down) to equal the original monthly mortgage of $2,850. If our original buyer at $625 in July 2005, has to sell at $474, they will
- Have lost their entire $125k down payment
- Have zero equity in the home
- Have to likely write a check to terminate the balance of the loan for $20k or so.
Ok, so I know there are not a lot of $625k homes for sale in the North Country - 14 by my count - but the impacts are meaningful if this plays out downstate or across the US. A weakening housing sector will hurt job growth, hamper tax receipts, negatively affect state funding for schools and possibly impact Federal spending on military bases like our lifeblood - Ft. Drum.
In 1997, I was beating the drum that outsourcing was coming. It took 7 years for everyone to catch on and by the time we did we were all calling Frank in Bangladesh to fix our PC. I may be early on this call, but the impact of interest rates on housing and ultimately our entire economy could be dire.