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Post Election Interest Rate Spike – How Bad Is It?

We have been enjoying historically low interest rates over the past couple years, and as many of you are aware, rates spiked upwards right after the election, and this has some people in a frenzy. If you are interested in all of the details – an article from Inman, Is the ‘Trump Tantrum’ mortgage rate spike driving buyer urgency?, dives a bit deeper. But here’s the gist of it, some quotes from the article, and a big picture view.

Big Picture

The current interest rate is still lower than what it was last year at this time, which was 3.97%. Below is a graph showing the progression of rate fluctuations over the past year.

And now for the really big picture! Here is a graph of interest rates over the past TWO HUNDRED years. I drew a line for where we are at today, and you can see that there are only a couple of times in (very nearly) our country’s entire history that rates have been lower than they currently are.

Interest rates on 30-year fixed rate mortgages (FRM) raised from 3.77% to 3.95% last week. While no one could have fully anticipated the affect the election had, we have long been expecting an interest rate hike, and lo and behold – here we are.

The kind of increases predicted for 2017 will marginally affect buyers’ monthly mortgage payments, as the Feds are approaching rates cautiously expecting a gradual and steady increase. It is predicted that we are headed into a long-term rise in rates.

“However, I think that, barring bad news in the economy, this time we are in for lengthy rise in rates over the next few years that will make buying a home significantly more expensive.” -Steve Cook, editor of Real Estate Economy Watch

What’s it mean for sellers?

The general rule is that as interest rates 1% it cuts buying power by 30%. Mark McLaughlin explain this in terms for sellers.

Pacific Union International CEO Mark McLaughlin in the Bay Area told Inman: “If I am a seller in the next 24 months, I would be acutely aware that every 1 percent rise in mortgage rates effectively eliminates 30 percent of the portion of buyers … 25 percent in the Bay Area can afford a $1 million mortgage at 4 percent, 20 percent at 5 percent and 16 percent at 6 percent.”

What’s it mean for buyers?

Well, it means that buying a house right now is still more affordable than it has been in decades, but the price of owning a home is going to increase along with rates. Many buyers are exhibiting a new sense of urgency to find a home before they raise any higher to keep their monthly payment at a minimum. Interest rates are the number one factor that affects your monthly mortgage payment (even more so that the purchase price, if you can believe that).

Bottom Line

Stay calm, no need to panic. If you’re planning on buying or selling in the near future, be aware that you can expect rates to rise over the next few years, which will negatively affect your bottom line and increase your monthly payments. Some people are reconsidering how soon they are planning on making that move they’ve been thinking about.

Do not feel like the rate hike is catastrophic though- the 45-year average for interest rates is 8.24% – I’d say we’re still looking pretty good sitting below 4%.

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