Just in case you missed it mortgage rates have really been rising since mid-September when the 30 year fixed rate bounced off of a short term low of 3.78% and has recently hit 4.43%. For historical perspective you can check out the interactive mortgage rate graph below from the Federal Reserve Bank of St. Louis (the data is courtesy of Freddie Mac). As you can see in the graph this is actually the highest mortgage rates we've seen in 4 years, though rates have bounced all over the place during that period. Most recently we went through a similar rise back in late 2016, which was followed by another gradual decline.
Where Do Mortgage Rates Go From Here?
The obvious question is where do mortgage rates go from here? Nobody really knows for sure but let me give you a few clues about what matters in this discussion and what doesn't.
First, you've probably heard a lot of noise about the Federal Reserve "raising rates" 3 - 4 times this year. Just for the record that really has nothing to do with mortgage rates. It's the fed funds rate they are talking about and as I explained in a previous post the fed funds rate has little to do with mortgage rates.
The 30 year mortgage rate more closely follows the 10 year treasury rate and that rate is more dependent on two other factors that don't get as much press: 1) How much longer term debt the federal reserve chooses to buy and hold on their balance sheet and 2) Since we live in a global market...what other countries choose to do with their debt. Right now the Federal Reserve is selling off the bonds they've been holding like forever so that will cause longer term rates to rise. Furthermore, other countries are allowing their longer term interest rates to rise so that will push our longer term rates up in tandem.
So the writing is on the wall. More mortgage rate rises to come over the next few years.
How Will Higher Mortgage Rates Affect The Real Estate Market?
As I've also pointed out in previous posts I don't expect rising mortgage rates to crash the Chicago real estate market. In theory I expect all demand to shift from higher price points to lower price points. There might be some damage at the higher end but I think the lower end will be OK.
However, in recent weeks it has occurred to me that rising mortgage rates might cause the real estate market to slow down and the already tight inventory to shrink even further. The reason is that it discourages people who are living in a home with a 3.5% mortgage from moving into a home with a 4.5% mortgage. For instance, assuming a $400,000 mortgage that would increase a monthly payment from $1796 to $2027. So this would serve to reduce both housing demand and supply as people choose to stay put longer. But because both demand and supply are being depressed I wouldn't necessarily expect this to pressure home prices.
Gary Lucido is the President of Lucid Realty, the Chicago area's full service discount real estate brokerage. If you want to keep up to date on the Chicago real estate market, get an insider's view of the seamy underbelly of the real estate industry, or you just think he's the next Kurt Vonnegut you can Subscribe to Getting Real by Email using the form below. Please be sure to verify your email address when you receive the verification notice.