Posted on July 23rd, 2013
The recent rise in mortgage rates has made buying a house a little more expensive. However, because mortgage rates are still near long-term lows, and because prices fell so much after the housing bubble burst and remain low relative to rents even after recent price increases, buying is still much cheaper than renting. That means that the recent jump in rates doesn’t change the rent-versus-buy math much. Nationally, at today’s prices and rents, buying would be cheaper than renting until the 30-year fixed rate reaches 10.5%.
Historical 30-year fixed mortgage rate (Source: Mortgage-x.com)
But just because buying is cheaper than renting, it doesn’t mean you can buy. Lots of people who want to buy don’t have the downpayment or can’t get a mortgage. Even people who can swing it financially might not be able to buy right away before rates rise further, because they might not find the home they want quickly with inventory still so tight.
For people looking to buy, rising rates do make housing more expensive. Rates are now on the rise and are likely to keep rising, thanks to the strengthening economy and the Fed eventually trying less hard to keep rates low. But it will take big rate increases to turn off prospective homebuyers. At today’s prices and rents, rates would have to rise to levels we haven’t seen in 20 years before renting is cheaper than buying a home on average across the country.
Stronger economic growth makes homebuying more attractive, as people are more confident in their jobs and incomes. Higher inflation can make homebuying more desirable, as you are buying a large asset whose value should rise with inflation while taking on a debt that has a fixed interest rate.
As long as home prices remain below the level where affordability is out of reach, and so long as mortgage rates are rising because the economy is on the mend, the housing market should be able to withstand the blow.