How Rising Interest Rates Will Impact 2017

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Interest rates have risen more than half a percentage point since the election, and economists are bracing for higher rates in 2017.

Rising rates make for more expensive mortgage payments; therefore, homeowners are more likely to remain in place rather than trade up. The average rate for a 30-year fixed-rate mortgage has risen to 4.13% boosting the monthly cost of owning a typical home by over $70 a month.

Homeowners in pricey coastal markets, where affordability is already strained, could feel the pinch sooner. In California, where the median-priced home is closer to $500,000, homeowners are looking at paying about $170 more a month based on the recent rate rise. According to Zillow, a typical household in Los Angeles already spends 38% of its income on mortgage payments—greater than the recommended 30%.

In all, about 66% of U.S. homeowners with mortgages have rates of less than 4.5%, according to real estate analytics firm CoreLogic Inc. Economists said rates would likely need to rise above 5% for a large number of homeowners across the U.S. to face the rate lock dilemma.

Many economists expect mortgage rates to continue rising gradually from here, though such predictions have been wrong before. Rates have risen because the economy is strengthening and investors are betting that tax cuts and increased government spending on infrastructure will spur more growth. But the fact that so many homeowners now enjoy such low rates could also prove an economic brake, creating a disincentive for homeowners to move to a new city in pursuit of a new job if it
means their mortgage might be more expensive, said David Berson, chief economist at Nationwide Insurance.

Recent history suggests the impact of rising rates can be swift and substantial. In 2013 mortgage rates surged to 4.5% from 3.6% as investors anticipated the Federal Reserve would pull back from its bond-buying program. The pace of sales of previously owned homes declined 8% from July to December of that year, according to the National Association of Realtors.

“If 2013 is any guide, we could expect to see a slowdown in [price] appreciation,” said Ben Graboske, vice president of Black Knight’s data and analytics division. “We still think house prices will grow, just more meekly.”

Read the full article from the Wall Street Journal at http://www.wsj.com/articles/rising-mortgage-rates-could-threaten-housing-demand-in-2017-1481457602