How Long Will These Historic Low Housing Interest Rates Last?

Craig D. Antonelli, President of Antonelli Construction, LLC

and Chairman of the Rochester Homebuilders Association

For Americans looking to achieve the dream of homeownership, today’s historically low mortgage interest rates make this a great time to buy a home.  Low mortgage rates and affordable house prices will not last forever.  The longer you wait, the more you might have to pay to achieve your dream of homeownership.

Why are interest rates currently so low? Much of it is due to the recent recession and its aftermath.  When the economy was in the dumps, the demand for loans fell sharply.  At the same time, investors sought safe places for their money, moving away from stocks and towards fixed-return investments such as U.S. treasury securities and mortgages.  Also, the Federal Reserve increased funds in the financial system to keep interest rates low and to support the mortgage market.  The combination of weak loan demand and the influx of funds translated into low interest rates on mortgages and other loans.

Currently, 30-year, fixed-rate mortgage rates are significantly below five percent (5%) (According to Freddie Mac).  These rates are among the lowest rates recorded in 40 years.  Remember back in June 2007 when rates were around 6.75 percent?  How about 20+ years ago when they were in the double-digits?

Since mid-2009, the U.S. economy as a whole has seen improvement, as evidenced by improved gross domestic product (GDP) numbers and in declining unemployment rates.  The economy is still in the early stages of a recovery, but it is inevitable that interest rates will move higher.  As the national economy rebounds, demand for loans will rise.

When the Federal Reserve sees that the economy is in better shape, it will take away the additional liquidity it has injected into the financial market and investors will move away from fixed-income assets such as mortgages.  All this supports the notion that interest rates will rise in the not too distant future.

So, there is no better time to buy a home because this opportunity will not last forever.

When interest rates go up, the effect on monthly payments can be dramatic.  A $200,000, 30-year, fixed-rate mortgage with a five percent (5%) interest rate has a monthly payment of $1,074. At six percent (6%) the monthly payments increase to $1,199 — an increase of $125 a month.  Total interest payments over the life of the loan increase by a massive $45,165!

Home buyers who are waiting for prices to drop further could be making a costly mistake.  Using the example above, if loan rates went up to 6%, the home’s price would have to go down 10 percent — to $189,000 — to maintain the same monthly mortgage payment.  House prices have stabilized or even started to inch upwards in many markets, and it is unlikely prices will drop that much.

The bottom line is this: There is a multitude of good reasons to buy a newly built home, but the most compelling reason is the availability of Extremely Low Mortgage Rates and affordable house prices.  Both of these will not last forever.  The longer you wait, the more you might have to pay to achieve your dream of homeownership.  Now is a good time to buy a new home.

For more information on why now is a good time to buy, contact The Rochester Home Builders Association at www.rochesterhomebuilders.com

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