Will Higher Interest Rates Create Housing Crash?

Dated: 07/12/2018

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We are all hearing about rising rates and a cycle overdue for a crash. Keep in mind, rising rates are a reflection of a strong economy. A strong economy typically increases demand for housing. Rising rates will also keep some people from selling, especially thosewith exceptionally low interest rates on thier current home. They will be reluctant to start over with a higher rate. Both of these issues lead to increased demand, which props up prices. Of course, housing is impacted by many factors and those could have an impact on pricing but any softening will be a symptom from another area like trade wars or government intervention and not interest rates alone.

There are countless owners who attempted to time the market and sold over the past few years to take advantage of this run-up. Of course, that has cost them a bunch of money since they missed out on some of the highest appreciation in memory.
If I told you homes are more affordable now than they were in the 10+ years leading up to 2000, you might think I’m crazy! Interest rates are a huge factor in affordability. Back then, rates were around 8.9%. Today is more like 4.5%, almost half. If we assume a $700,000 home with 20% down, all other being equal, the payments go from approximately $3,555 to $5183 per month, including taxes and insurance. In addition, incomes have increased over that time.
In terms of affordability, the peak back in 2006 was 25.4% of median income going toward housing payments compared to today where it is 17.1%. What’s more, if rates go to 5%, affordability will be at 19%, still below pre 2000 and way below the 2006 peak. At 6%, it would be 21.2% which puts it right in line with pre 2000 levels. Even at 7%, it would be below the peak of 2006 at 23.5%.
So, if you are waiting for a better time to buy a home, it might be a while before it’s better than now!

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Randy Hill

Office Address: 12501 Seal Beach Blvd., Seal Beach CA 90740


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