The historically low interest rates that have been one of the principle mainstays of the housing recovery are….well….history. “The training wheels have been taken off the bike,” went the metaphor used to describe how the housing recovery is now strong enough to stand on its own.
The Return of Higher Interest Rates
Last week, the interest rate on an average 30-year fixed rate mortgage rose to 4.46%, the highest it has been in almost two years; and the largest one-week increase in over 26 years. And while most pundits expect rates to hover at this level through the end of 2013, they all agree that the ultra-cheap rates that have existed for the last two years are a thing of the past. Still, the past helps lend perspective to the present; and from a historical perspective, the current rates remain well below the record highs and yearly averages of the past 30 years. In fact, when rates finally broke below 6% in November 2008 a cheer went up throughout the land and the experts wondered aloud how long such low rates could possibly last. As it turned out, quite a while. Average monthly rates have now stayed below 4% since late 2011; and are well below the all-time high of 18.63%, set in October 1981. Thus even at their current levels, interest rates are still remarkably low, having averaged 8.6% since 1971.
The Challenge to the Real Estate Market
Last week’s rate increase will most certainly test the mettle of the housing recovery over the short term. It may ultimately inhibit some from buying; while compelling others to pursue lesser-priced properties; or push them to the upper limits of what they can afford. Others less affected by changing rates will simply buy as quickly as they can as a hedge against further rate increases. Over the long term, however, rising interest rates set against a backdrop of more properties on the market will inhibit the dramatic price gains of late; and effectively quell all fears of another housing boom and bust. Nationally, property inventories in May were down 22% compared with May 2012, but increased 4.3% over April. This was the second straight month-over-month increase; and an encouraging sign that more sellers are being lured into the market by rising home prices and unprecedented levels of buyer demand—including their own pent-up demand for new housing.
From a Local Perspective
Because significantly rolled-back prices continue to account for our market’s high level of ongoing demand, Southwest Florida has yet to experience a similar increase in inventory. But it is only a matter of time before rising home values encourage more local sellers to list their homes; even as builders and developers rush to introduce new homes and condominiums to the market’s supply of available properties. At that point our market’s noteworthy price increases will slow to a more normalized level of property appreciation; and amid a steady rise in mortgage rates will actually help stabilize our market by making home prices going forward less prone to unsustainable spikes.