Combining factors – rising interest rates, increasing inventory, median house prices rising and a bit less urgency in the real estate market is calming the turbulent waters seen in earlier this summer in a VERY active real estate market. But what does that really say where the numbers are concerned.
Looking back earlier this year, it was not uncommon to see 3.5% interest rates. Rates are running between 4.5% and 4.65%. At first glance, a 1 percent increase might not seem so large, but as we have been reporting for months, when you factor this in with rising house prices it becomes more problematic. Let’s examine homes in a popular price range at $300,000. If a buyer puts $20,000 down on the house in a 30-year mortgage, at 3.5% the payment PITI, (payment, interest, average taxes and insurance), would be $1547 and change. At 4.5% it would be $1705 and at 5% it would be $1788. Generally, those with a FICO score of 750+ are the only ones being offered the lowest available rates. So those numbers are likely to increase pretty substantially when you start playing with FICO scores below the nationwide average of 720. You are now looking at 50% of the population faced with the possibility of receiving mortgages that are 1-2 entire points above the better scorers. That payment at 6.5% interest just turned into a $2051 payment – a FAR cry from the original $1547.
These scenarios and others like them are what analysts and those familiar with both the real estate industry and the lending industry project are going to prevent any chance of another bubble. The above scenario topped with stricter lending practices and standards have made a dent in the foreclosure rates, however, they have also contributed to part of the market cool off.