Worried About Interest Rates? Just Be Glad It’s Not the 1980s

 

Rising interest rates are a real concern today, but a recent blog post on Freddie Mac’s website helps put the topic in perspective.

The average interest rate on a 30-year, fixed-rate mortgage this week was 4.4 percent, up from 4.32 percent last week and 3.57 percent a year ago.

But in the 1990s, a comparable mortgage averaged 8.12 percent, and in October 1981 mortgage rates peaked at 18.63 percent. Ouch!

Freddie Mac, a federally chartered agency that works to make more money available for home loans, acknowledged that rates aren’t likely to return to November 2012′s record-low 3.31 percent any time soon, but it pointed out that they remain very low by historical levels:

  • In the 1970s, the average 30-year, fixed-rate mortgage was 8.6 percent. Monthly payments on a $200,000 mortgage were $1,589.
  • In the 1980s, The average 30-year, fixed-rate mortgage was 12.7 percent. Monthly payments on a $200,000 mortgage were $2,166.
  • In the 1990s, the average 30-year, fixed-rate mortgage was 8.12 percent. Monthly payments on a $200,000 mortgage were $1,484.
  • In the 2000s, the average 30-year, fixed-rate mortgage was 6.29 percent. Monthly payments on a $200,000 mortgage were $1,237.
  • This week, the average 30-year, fixed-rate mortgage is 4.4 percent. Monthly payments on a $200,000 mortgage are $1,002.

What is the likelihood that mortgage rates might soon return to double digits? Freddie Mac advises that you don’t lose any sleep over it. (And no one wants to revisit this scenario from 1981: At 18.63 percent, monthly payments on a $200,000 mortgage would be $3,117.)

Freddie Mac’s blog post also noted that rising interest rates and prices make many homes unaffordable for a median-income family in high-priced markets such as the Bay Area.

A map accompanying the blog post identifies San Francisco and San Jose as among the least affordable metro areas in the U.S. It also boasts an interactive component that allows you to determine mortgage payments in various cities for a median-priced home.

According to Freddie Mac’s tool, a San Francisco homebuyer who planned to put 20 percent down on a house with a mortgage rate of 4.4 percent would need to pay $3,974 a month to afford the median sales price of $682,000. San Jose buyers would be in for an even heftier monthly commitment: $4,513 to qualify for the $775,000 median price.

Buying a Home in the Bay Area Is Still More Affordable Than Renting

Even with a sustained rise in home prices over the past year, buying a home is significantly cheaper than renting one in the Bay Area.

On average, buying is 13 percent cheaper than renting a comparable home in the San Francisco metropolitan area, according to the latest Rent Vs. Buy Report from real estate listings syndicator Trulia. In the Oakland metro area, the savings total 24 percent. (The San Francisco metro area includes Marin, San Francisco and San Mateo counties; the Oakland metro area includes Alameda and Contra Costa counties.)

Rising home prices and mortgage rates have narrowed the gap between buying and renting over the past year, but sky-high rental prices still give the edge to homebuyers. A year ago, buying was 19 percent cheaper in San Francisco and 40 percent cheaper in Oakland.

Nationwide, buying a home is 38 percent cheaper than renting, according to the survey of 100 U.S. cities, conducted in December and January.

Trulia based its calculations on obtaining a 30-year, fixed-rate mortgage with a 4.5 percent interest rate; itemizing deductions at the 25 percent federal tax bracket; and staying in the home at least seven years.

Will renting become cheaper than buying soon? According to Trulia’s methodology, buying will edge renting by only 2 percent in San Francisco and 15 percent in Oakland when mortgage rates reach 5.5 percent. Currently, 30-year, fixed-rate mortgages average 4.37 percent, according to Freddie Mac.

Of course, comparing mortgage rates and rents is just one part of a potential homebuyer’s decision. Several months ago, a survey by the California Association of Realtors found that nearly 75 percent of renters rated homeownership “important.” Among renters who said they hope to own a home, 44 percent said they were renting only out of financial necessity.

Renters mentioned a lack of building equity, the inability to make changes to their living environments, and unpredictable rate increases as the top three things they dislike about renting.

Another report found that owning a home can make families healthier, happier, and more financially secure.

The survey of Canadian families living in houses built by nonprofit Habitat for Humanity found that 89 percent said their lives had improved since they moved into their homes, and 86 percent said their happiness had increased since buying.

2014 San Francisco Real Estate Update

Real Estate Roundup: New Home Sales Pace Strong as Year Begins

Here’s a look at recent news of interest to homebuyers, home sellers, and the home-curious:

NEW HOME SALES SURGE IN JANUARY
Buyers across the country snapped up new single-family homes in the opening month of 2014 at the briskest pace seen since July 2008.

Citing data collected by the U.S. Department of Housing and Urban Development and the U.S. Census Bureau, the National Association of Home Builders reports that 468,000 new homes sold in January, a 9.6 percent spike from the previous month.

New home sales were by far the most robust in the Northeast, where they shot up nearly 74 percent. In western states, they rose 11 percent in January.

According to NAHB Chief Economist David Crowe, the jump in sales is likely due to a combination of low interest rates, affordable prices, and an improving economy.


CALIFORNIA PENDING HOME SALES BACK UP IN JANUARY
After two months of dips, pending home sales in California were back on the uptick in January.

According to the California Association of Realtors, pending home sales in the Golden State increased nearly 23 percent from the previous month but were still down 17.5 percent from January 2013.

CAR’s report also provides statistics on distressed sales in the state, as well as individual counties. In January distressed sales accounted for 16 percent of all transactions in California.

Most Bay Area counties had fewer distressed sales than the statewide average. San Mateo County had the second-lowest percentage of distressed sales of counties included in the report, at 7 percent. Santa Clara (8 percent), Alameda (10 percent), Sonoma (11 percent), Contra Costa (12 percent) and Marin (13 percent) counties also came in below the California average.

Napa and Solano counties saw more distressed sales than the statewide average, at 17 and 22 percent respectively.


INVESTORS BACKING OFF OF REAL ESTATE MARKET
The number of institutional investors purchasing residential real estate in the U.S. reached a 22-month low in January, according to RealtyTrac data.

The firm defines an institutional investor as any entity that buys at least 10 properties in a calendar year. In January purchases by such investors accounted for 5.2 percent of transactions, down from 7.9 percent in December and 8.2 percent the previous January.

RealtyTrac also found that some metro areas with the biggest year-over-year price increases experienced slight monthly dips in the first month of 2014. Locally, both the San Francisco and San Jose areas – where prices are up about 25 percent from the previous year – saw prices slide 2 percent from December to January.


MOST TEACHERS UNABLE TO AFFORD A HOME IN CALIFORNIA
Rising home prices are increasingly pushing teachers out of the California real estate market, particularly in some of the most coveted Bay Area locales.

A recent Redfin study found that just 17 percent of teachers in the state — whose salaries average $69,000 — could afford the median home list price of $485,000. Seven of the eight Bay Area counties included in the study were even less affordable for teachers than in the state overall.

In San Francisco not a single home for sale was within reach of the average teacher. In San Mateo County, teachers could afford only 1.2 percent of homes on the market, slightly less than in Santa Clara County, where the number was 1.3 percent.