Housing, Rising Interest Rates, and BBQ Pits
August 7, 2018
By Tom Limoges • Trust Investment Officer
Last month, I completed a construction project that took two years and no, it was not a new house. I love to BBQ; whether it’s ribs, brisket, pulled pork or chicken, I enjoy smoking it all. A few years back I had a grand idea to add onto our outdoor patio and create a pit master’s paradise complete with a concrete countertop, grill, pellet smoker, and Big Green Egg –. Much of the reason behind this project was so I could create BBQ masterpieces, but another reason (which I sold my wife on) was that it would add value to our home. Home prices, both local and national, have advanced steadily over the last few years and for most families, their home represents one of their most valuable assets. But does the recent rise in interest rates raise concerns about future gains from the housing market?
Interest rates are on the rise.
Compared to a year ago, interest rates on conventional 15 and 30-year mortgages rose by about one percent. How does that impact housing prices? It all comes down to affordability, and since most home purchases are attached to a mortgage, rising rates can impact prices. Just as higher meat prices reduce meat consumption, higher rates affect the affordability of financing a home purchase. For example, an individual who purchased a home a year ago with a $200,000 mortgage (30-year at 3.8%) would have an estimated monthly payment (excluding insurance and taxes) of about $930 per month. Assuming rates are 1% higher a year later, the payment for a new $200,000 mortgage rises to $1050 per month. If $930 is the highest payment this individual can afford, the largest mortgage that the buyer can now afford is around $180,000 – not $200,000. Higher home prices combined with, higher interest rates have had an impact on recent housing affordability (see example below).
One widely followed indicator into the health of the national housing market is the inventory of homes available for sale. Declines in inventory are good for sellers because this means there are more buyers chasing fewer homes which drives prices up. While inventories have declined the last three years, the last quarter showed a rise in homes available for sale – the first quarter since 2015. This one quarter rise in inventory should not be viewed as the beginning of the next housing crisis, but it is something that should be monitored as we move into the second half of the year. This supply/demand relationship is in constant fluctuation, hopefully not like the temperature of your BBQ pit.
Should this rise in interest rates affect your buying decisions?
A growing housing market is considered a good sign of the overall health of an economy and consumer. While interest rates on home mortgages have increased from a year ago, they remain reasonable compared to long term averages. The overall US economy remains in good shape with low unemployment and rising wage growth. Have you been considering some changes to your existing home or possibly a change in homes, if so, this may be a good time to start planning and/or looking. Before you consider any changes, do you have a plan on how to pay for them? This would be a great time to sit down with one of our advisors and learn about what our projections can tell you about your financial readiness for future projects. With that information, if you need help financing that your new project or finding your new dream home we can help arrange a meeting with one of our lending specialists today.
The future can be bright if you plan for it but it requires commitment. Remember, “Failing to plan is planning to fail.” Let an Advisor help you be successful and transform dreams into realities.
Speaking of outdoor cookout, Security National Bank will be hosing a cookout in honor of our great customers on Friday, August 10th from 11am to 1pm at our downtown location (601 Pierce Street). We will also have a prize drawing for a $100 Visa gift card, Palmer Candy gift basket, and more.