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Has Rising Mortgage Rates Slowed Down Housing-Market Momentum?

Posted by Ken Meyer on Thu, Aug 01, 2013

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While mortgage rates are still near historical lows, they have adjusted upwards from the record lows set at the end of 2012. Many housing pundits will tell you that having rates go up is bad for housing investors, but they're missing two fundamental facts. With today's market drivers, slightly higher interest rates are a gift for savvy investors.

Two competing forces drive the current investment home market:

  • Traditional buyers are motivated to become homeowners by the low interest rates that can make owning seem cheaper than renting.
  • Investors are stuck in an extremely competitive market that makes it hard for them to find deals.

Rates haven't moved up enough to significantly dissuade traditional homebuyers. When good houses come on the market at a reasonable price, they sell. At the same time, higher rates could increase the motivation of lenders to start aggressively making loans. This could make it easier for buyers that are sidelined by credit issues to get back into the market and further stimulate demand. In other words, the demand side of the equation remains strong.

Supply, however, has been a challenge for investors. While millions of distressed properties still remain in the country's housing stock, the best ones with the best prices typically bring fierce competition from a population of too many investors chasing too few good deals. Some of those investors, many of whom will be the less savvy ones that are likely to overpay for a property, will listen to the pundits predicting doom. As they exit the market, competition goes down for the deals that you want to buy.

It's true that higher interest rates will increase your carrying costs. However, the impact is nowhere near as significant as it seems. As of July 2013, owner-occupied interest rates have moved up roughly 96 basis points -- from 3.40 to 4.36 percent according to data from Bankrate. If your financing moves up twice as much, which is unlikely, you'd have an extra 1.92 percent in cost. 

As an example, if your loan has a 60 percent loan to value ratio and you hold the property for nine months before turning it, you'll pay an extra 0.864 percent of the property's value in interest. Reduced competition should bring prices down by at least that much. If they don't, your margins should be broad enough for you to absorb that additional cost and still make a healthy profit.

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