Market Watch | The Effect Of Higher Interest Rates

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Market Watch | The Effect Of Higher Interest Rates

By Steve Blank | Managing Broker Fuller Sotheby’s International Realty Downtown

house-and-money-percentage-sign1Interest rates do not make or break a real estate market.  Typically they are a representation of what is taking place in the economy.  Interest rates are a reflection of the simple economic laws of supply and demand. For instance, we saw the rates steadily trend downward as the real estate market followed the economy into what may have been the worst recession since the depression in the late 1920s.  And for obvious reasons, there was very little demand for mortgage money from the second half of 2008 through 2011. We enjoyed historical low rates that did not start leading north until mid-June.  Consumer confidence in the economy was noticeably low, which also resulted in limited demand for mortgage money (except for an increase in refinancing).  Mortgage rates are still fabulous (± 4.5% range), however the refinancing binge will soon diminish as rates continue to move a little higher.  It is no coincidence that the real estate market has been consistently improving while interest rates begin to climb. Higher demand reflects an increase in the all-important level of consumer confidence in the economy.

It is interesting how the consumer was completely aware of the historically low mortgage rate, and yet most people wait until the rates have started to increase before they move forward on their housing desires.  It’s all about confidence.  We generally wait until other people test the water before we feel it’s ok to go in.  Prices in Metro Denver appreciated over 11% in 2012.  It appears this year will look quite similar (if not better) in most Denver neighborhoods.

Looking at the realities of the above statistics, you may feel inspired to consider focusing on your personal and family housing needs.  The average cost of a 30 year fixed loan was about 4.4% on June 21st, from 3.95% on June 14th, and hit a low of 3.36% in December.  Of course that rate was hovering at 4.625% on July 4th.

I do not believe rates will go much higher before the end of the year, but let’s take a look at how these recent changes impact a simple 30 year, $300,000 loan. If we go back a few weeks and calculate that loan at 4% the principal and interest payment is $1431/month.  And at 4.75% the same loan goes up $135 ($1,566) per month. That example does not even factor in an increased value (from$360,000) of $35,000-$45,000 for appreciation over the last year.  Hopefully, this is a signal for people to be pro-active.  According to Trulia’s chief economist, Jed Kolko, “their recent increase does not change the rent vs. buy math very much.  Buying still looks over 40% cheaper than renting.  Rates would have to rise to over 10%, in order for renting to be cheaper than buying”.  In the near term, I do not think rates will have significant influence on the housing market.  The local and national economy, along with their respective real estate markets, continues to improve, thus creating a higher share of consumer confidence with increased housing demand.

Turning to the local market, we see strength building in virtually every important category.  These figures compare Q2 of 2012 to Q2 of 2013, offering a comprehensive view of these central neighborhoods.  The average price and average price per sq ft suggest great consistency at 15% and 17% higher from the prior year.  And with the number of sales being 26% stronger while sellers receiving 98% of their list price demonstates that we are proving to be a resilient market. Contact Fuller Sotheby’s International Realty to talk real estate. Our team of expert professionals are here to help you navigate through the ever-changing marketplace.

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