The folks at cnbc debate the effects of higher mortgage rates here:
http://video.cnbc.com/gallery/?play=1&video=3000177704
Diana said, “I’m not so sure that interest rates are worse than rising home prices. We have seen a spike in home prices because of low inventories and that’s a far bigger deal than rising mortgage rates going up a lot.”
If you purchase a home today, there is effect from both higher prices and rates. Let’s compare the difference in costs.
Here are two homes on the same side of the street in Carmel Valley for comparison. The first closed for $714,500 in April, and the second is the same model, asking $757,000-$777,000:
http://www.redfin.com/CA/San-Diego/12931-Cristallo-Pl-92130/home/4466161
http://www.redfin.com/CA/San-Diego/12955-Cristallo-Pl-92130/home/4466152
The jumbo-mortgage rates didn’t jump as dramatically this week as the conforming-loan rates. Let’s use a 0.50% increase for the example, and a 20% down payment:
House #1 – Sales price $714,500
$142,900 down payment
$8,574 closing costs (1.5% of loan amount)
$151,474 cash needed
$3,570/mo. PITIHOA at 3.875%
House #2 – Sales price $777,000
$155,400 down payment
$9,324 closing costs
$164,724 cash needed
$4,046/mo. PITIHOA at 4.375%
Today, you need $13,250 more cash, and be willing and able to pay an additional $476 per month to buy the same house than three months ago.
There were also four of this model that sold in the $600,000s last year.
Last June, there was a $680,000 sale, which with 20% down would have dropped you under the high-balance conforming loan limit. The difference? Cash needed was $22,895 less, and difference between the PITI payments was $661/month.
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One answer? More creative financing.
In the video it was mentioned that credit standards could loosen. Hat tip to daytrip for sending this in:
http://www.latimes.com/business/realestate/la-fi-mortgage-credit-20130622,0,6373202.story
Real estate agent Mickey Knickerbocker was as surprised as anybody when her client closed on a $905,000 Manhattan Beach town house using “piggyback” financing: a two-mortgage deal designed to minimize the down payment.
Popular during the housing boom, piggybacks all but disappeared after the mortgage meltdown taught banks and regulators a big lesson: Borrowers needed to have skin in the game. So the loans seemed like a throwback to the days of carefree lending, especially on such a pricey property.
“I don’t think, a year ago, I could have gotten loans that would have served this purpose,” Knickerbocker said. “I didn’t even know … that this was going to be possible.”
With home prices rising, risk is creeping back into mortgage lending. In addition to creative down-payment arrangements, mortgages on high-end properties — so-called jumbo loans — have also gotten plentiful and cheap. Meanwhile, banks are accepting borrowers with lower credit scores and allowing them to take on more debt relative to their incomes, experts and industry professionals say.
And lets make the range of options complete. 12956 Cristallo rented for $3395 a month in May. So instead of buying the one that is on the market today, keep your $165k invested and pocket the $651 a month and have no repair and maintenance obligations…..
What’s lost in all the mortgage rate fluctuations is that incomes are not rising. Therefore, rising rates will slow the market down considerably for all except those with deep pockets.
JtR,
do you expect a lot of escrows that were opened in the last couple of weeks to crash and burn based on these new rates?
No buyers had to fight too hard to get this close to the end zone. There will be a few that wont qualify but you can always buy down the rate or choose an interest only loan.
So the assumption is rising rates into the foreseeable future?
My guess is flat for now due to profit-taking expected in next week or two.
What’s lost in all the mortgage rate fluctuations is that incomes are not rising.
However incomes of the top 10% have been, and the people buying in CV are in the top 10% if not in the top 1% of income earners in this country. We don’t necessarily need to see median incomes rising across the country, to see house prices rising in a place like CV, Solana Beach, Del Mar etc.