Many economists saw their predictions of higher interest rates and stronger economic growth shattered this year, mainly due to global economic uncertainty which was then heightened by June’s Brexit vote in the U.K.
Instead, the U.S is currently experiencing low interest rates and mortgage rates that are the lowest since 2013. While these low rates are boosting the purchasing power of buyers, “A look at the pros and cons of this recent drop in mortgage rates shows that they may not be as unambiguously beneficial to the housing market as previous low rates have been,” says Danielle Hale,
She listed a few of these pros and cons in a recent blog post:
- This year has seen a mortgage rate reduction of more than 50 basis points, which gives potential buyers more purchasing power. As Hale points out, a 50 basis point reduction cuts down monthly payments by nearly $50 per $100,000 in home price.
- Income needed to qualify is also reduced by around $1,000 due to this type of mortgage rate reduction.
- Using recent median home price data, this also comes out to a $2,500 reduction in the income needed to finance a home with a 20 percent down payment.
- While the Brexit vote in June caused mortgage rates to decline, as well as escalated the overall economic uncertainty, most of the mortgage rate decline actually occurred in the first quarter of 2016, a sign that many people had prior concerns about the global economy stagnating.
- This unpredictable global financial news is already causing many consumers to be less optimistic about the state of the housing market, and slowing global growth could also make consumers nervous about its effect on the U.S. labor market.
- Many potential first-time buyers are having trouble finding affordable housing options due to a lack of inventory, and others are struggling to save up for a down payment due to the burden of student loan debt and high rental prices. As Hale points out, this means that the overall benefits of low rates are only being felt by people who already own a home, which adds to the growing wealth gap in the U.S.
Still, “Thus far, the U.S. economy has proven resilient to the weaker global economic environment,” says Hale. “A stronger U.S. consumer, who benefits from lower financing costs, may help ensure that trend continues.”
Source: “Low Mortgage Rates and the Housing Market: Pros and Cons,” Economists’ Outlook Blog (July 7, 2016)
“Copyright NATIONAL ASSOCIATION OF REALTORS®. Reprinted with permission”