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Mortgage rates skyrocket above 3% — how high can they be before they scare homebuyers?

Interest rates are rising rapidly and we are concerned about the impact of that move on the US real estate market. However, one analyst suggests that investors should take a deep breath.

The average 30-year fixed rate mortgage for the week to March 4 was 3.02%, up 5 basis points from Freddie Mac last week. Report on Thursday.. The benchmark mortgage rate has exceeded 3% for the first time since July 2020.

Meanwhile, 15-year fixed-rate mortgages have remained unchanged at an average of 2.34% on a weekly basis. Floating rate mortgages in the Treasury index for five years averaged 2.73%, down 22 basis points from the previous week.

This rise in interest rates reflects the movement of the bond market. February, US Treasuries Record the largest surge every month In yield since former President Donald Trump won the 2016 election.

As bond yields rose in 2021, mortgage rates also rose. “By May, the U.S. president has shown that there should be enough COVID vaccine available to all Americans, and investors have withdrawn from the bond market as the U.S. House of Representatives has passed additional stimulus measures in its latest bill. We raised interest rates, “said George Latiu. , Senior Economist.

Mortgage rates generally follow the direction of long-term bond yields, especially 10-year government bond yields.

“There is a clear directional relationship between Treasury yields and mortgage rates, but the spread between Treasury and mortgage rates can fluctuate and is affected by many factors. The relationship is not linear, “said real estate and accommodation analyst Jonathan Wolosin. UBS Financial Services for Americas
+ 1.49%
I wrote in a new research report.

A year ago when concerns about the COVID-19 pandemic were enthusiastic, the relationship Between mortgage rates and Treasury yields It has weakened. Lenders struggled to meet demand when the refinancing boom first began, as mortgage rates fell to record lows.

As a result, some lenders have opted to increase rates to discourage new applicants from joining the mix so that they can handle a pile of existing applications.

Today, mortgage rates are rising rapidly, with 30-year fixed-rate mortgages rising more than 30 points from the lowest recorded in January.

“Investors are beginning to wonder if the smoke of rising interest rates could throw cold water into the housing market,” Wollosin wrote.

But in his report, Wolosin argues that fears of interest-rate-led housing recessions may be overestimated. In his view, the median homebuyer can accommodate a rise in mortgage rates of 75-100 basis points (100 basis points equals 1%).

“A kneeling reaction from many market participants and the media is that rising mortgage rates will ruin the housing market.”

— Jonathan Woloshin, Americas Real Estate and Accommodation Analyst at UBS Financial Services

The flexibility of current homebuyers reflects how much mortgage rates have fallen. Citing Freddie Mac, Mr. Warosin said the current average interest rate on 30-year fixed rate mortgages is still well below the 20-year average of 4.9%.

the study. Today’s low interest rate environment provides a cushion for homebuyers.

“The kneeling reaction from many market participants and the media is that rising mortgage rates will ruin the housing market,” Woloshin wrote. “Although we always keep in mind the psychological and financial implications of rising mortgage rates, it’s important to understand what the true magnitude of rising interest rates means for monthly payments. . “

To explain his claim, if you rent an existing home with an average price of $ 308,300 with a 10% down payment, raising the mortgage rate to 4% will increase your monthly payments by only $ 117.

Similarly, he calculated how much the buyer could afford if he wanted to keep his monthly payments the same at that high interest rate. In this scenario, a homebuyer can pay a mortgage of up to $ 1,355 per month at an interest rate of 3.25% and a down payment of 10%.

If interest rates rise to 3.75%, buyers will need to increase their down payment to 15% or reduce their housing spending to $ 325,000 to maintain the same mortgage payments.

These considerations apply to the more expensive real estate market as well. “We believe that even high-priced homes, well above the US median, can withstand a rise in mortgage rates of at least 75 basis points, even with a 10% down payment.” He writes.

Others are now taking a more cautious view of the market. Mortgage applications are declining, including loans used to buy homes, according to data from the Mortgage Bankers Association. “The recent rise in mortgage rates seems to have weakened homebuyers’ enthusiasm,” said Daniel Hale, Chief Economist at Said recently, Quote application data. “Rising interest rates and rising home prices amid a shortage of home supplies will undoubtedly challenge many homebuyers.”

Mr. Wolosin said he operates under the assumption that rising interest rates will stop the trend of rising house prices.

“We believe that a continuous rise in mortgage rates will help slow the pace of rising home prices, which in our view is actually for the long-term health of the home market. It will be a plus, “he said.

Mortgage rates skyrocket above 3% — how high can they be before they scare homebuyers? Mortgage rates skyrocket above 3% — how high can they be before they scare homebuyers?

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