Over the last month and a half mortgage interest rates have risen 3/4 of a percentage point from 3.5% to 4.25%. That is a big move over a short period of time prompting prospective home buyers to ask, “Will interest rates continue to go up?” And, “Should I buy a house now or wait for rates to fall back below 4 percent?”
Federal Reserve sparks speculation: Ben Bernanke, Federal Reserve Chairman, indicated last week that they will begin cutting back on their purchases of mortgage backed securities and Treasuries later this year. His comments served to further weaken demand for these securities causing prices to plunge and mortgage interest rates to go up (bond prices and yields move in opposite directions). The Fed is expected to stick with this plan and let the market determine mortgage interest rates as long as the market continues to show signs of improvment.
Three percent a thing of the past: Don’t expect interest rates to drop below four percent again this year but don’t expect them to keep climbing so rapidly either. Many experts believe that the dramatic rise in rates over the last few weeks was the bulk of the move we will see in response to the Federal Reserve’s shift in policy. They also say that moving forward, rates should stabilize in the four percent range.
Erosion of purchasing power: If mortgage interest rates do stabilize then most of the damage from interest rates has been done, to the tune of about $40 per month for every $100,000 financed with a 30 year, fixed rate mortgage. The other threat to buying power that has yet to show signs of stabilizing is home prices. Since January of this year the average price per square foot of homes sold in Central Oregon has risen 16 percent and in Bend it has gone up 11 percent. For a $200,000 home, an 11% price increase translates to a monthly payment increase of $88 on a 30 year mortgage at 4.25% with 20% down payment.
Lack of inventory has been and continues to be the main contributing factor to rising home prices here in Bend. Although it has improved this Spring, the number of homes for sale in Central Oregon was still below 2000 for the ninth consecutive month. You have to go back to 2004 to find a time when there were three consecutive months with fewer than 2000 homes for sale.
For those home buyers who have been sitting on the fence, the events of the last few weeks (and months even) should be enough to drive them to action. Fear of further interest rate spikes is already motivating buyers to move quickly to find a house, placing more demand on already low inventory and, you guessed it, driving prices higher. This Bend, Oregon real estate market is a prime example of a situation where it doesn’t pay to wait to buy a house.