Homebuyers counting on affordable mortgage interest rates may want to start looking for their new home now. According to Bankrate.com, mortgage interest rates have hit a new high for 2016. The Dec. 21 national rate for a 30-year, fixed-rate mortgage was 4.17 percent, one of the highest mortgage interest rates for the year.
That could add up for homebuyers in the Flagstaff area, where the median sale price for a single-family detached home within the Flagstaff metropolitan area in November was $360,000, according to sales figures based on the Northern Arizona Multiple Listing Service. That’s a 7 percent increase from the November 2015 median price of $335,000, according to Flagstaff Century 21 Realtor Stephen Brighton.
Lisa Paffrath, the owner and broker of Grand View North Realty, said mortgage interest rates started climbing after the election. The uncertainty of the election caused ripples in the stock market and mortgage rates are tied to the stock market.
According to Bankrate.com, rates have been steadily increasing since the website’s Sept. 28 survey, when the average interest rate was around 3.54 percent. What many first-time home buyers don’t understand is that higher mortgage interest rates mean more than just a higher interest bill on a mortgage, Paffrath said.
“It actually reduces your purchase power,” she said.
Realtors estimate that for about every quarter of a point increase in interest on a mortgage a buyer loses about $10,000 of purchase power, Paffrath said. The rate rise since last September has cost homebuyers more than $20,000 in purchase power.
According to the U.S. Census Bureau, the median income of a family in Flagstaff was $66,796 in 2015. The median gross rent for that same time period in Flagstaff was around $1,050 and the median monthly cost for a home with a mortgage was around $1,581.
Using the numbers from the Census Bureau, Jennifer Berry, a team loan officer from Prime Lending’s Moore MacFerren Group, said a median income family affording a monthly mortgage on a $360,000 home in Flagstaff would be extremely tight.
The average mortgage rate for a 30-year, fixed-rate mortgage in Flagstaff is around 4.75 percent without discount points, she said. A buyer with good credit and a gross annual income of $66,000 and who spends 45 percent or less of their total gross monthly income on debt expenses, including credit card bills and car loans, would pay around $1,700 a month on a mortgage for a $360,000 home, if they paid a 20 percent down payment on the mortgage, or $72,000.
In order to be eligible for that mortgage at the Moore MacFerren Group, a buyer with an annual gross $66,000 income would have to have $900 or less in monthly debts and expenses, Berry said. Those debts and monthly expenses include credit card debt, car loans and student loans that are reported to credit agencies, but not items like utilities.
With the median price around $360,000 in Flagstaff, that prices a lot of first-time homebuyers out of the market within the city limits, Paffrath said. Finding a less expensive home outside of the city limits, in communities like Bellemont and Williams, is an option. But many first-time homebuyers or families want access to all of the great activities that Flagstaff has.
The Arizona Home Plus and Federal Housing Administration loan programs can help, Paffrath said, but only to a certain extent. For example, the FHA’s loan program has a limit on the price of the house. The department is looking at raising that price due to the increase in interest rates.
But for some homebuyers, it might be better to just continue to rent and save as much money as they can, right now, she said.
Higher interest rates can also have an effect on the number of homes on the market, she said. People who own a home now and have a mortgage with a lower interest rate than the current rate are going to be less likely to sell. They don’t want to move into a new home and pay a higher interest rate, so they’ll stay put until rates come down again.
This drives down the number of homes on the market and drives up the price of homes that are for sale, Paffrath said.
The National Association of Realtors expects mortgage interest rates to continue to climb in the new year. Lawrence Yun, NAR chief economist, said, “As a result of the anticipated economic stimulus in early 2017, mortgage rates post-election have now surged to around 4 percent as investors expect a strengthening economy and higher inflation. In the short-term, some prospective buyers may rush to lock in their rate and buy now, while others — especially those in higher-priced markets — may be forced to delay as a larger monthly payment outstretches their budget."
Paffrath doesn’t expect to see a rush of homebuyers trying to beat the rising interest rates until after the holidays. Home sales usually slow down around the holidays, she said.