Dark side of low mortgage rates

Lawrence Yun at the CAR convention in Denver.

There is no denying that the lowest mortgage rates on record have been a boon to the housing market, the overall economy and consumers.

A 3.5 percent rate for a $300,000 mortgage trims about $450 a month off of the same loan with a 6 percent mortgage.

Multiply savings like that for millions of home buyers and those refinancing existing mortgages and that is like providing billions of dollars in tax-free income to consumers that they can spend elsewhere.

Super-low mortgage rates also allows people to buy homes that they never dreamed they could afford, a big factor in fueling demand in the Denver area and nationwide

But there is a potential long-term dark side to the lowest mortgage rates in history.

Will homeowners who locked in rates at 3.25 percent or 3.5 percent for 30-year money and even lower for 15-year mortgages, be willing to walk away from those attractive rate when rates inevitably rise?

“That is a very good question,” Lawrence Yun, the chief economist for the National Association of Realtors, said in an exclusive interview with InsideRealEstateNews.com, following an address he made at the Colorado Association of Realtors’ convention on Monday.

He called homeowners lucky enough to have landed incredibly attractive rate as the “locked-in effect.”

Yun said that when mortgage rates rise, buyers who normally would be buying homes, either trading up or down, will be “more resistant to change. People love their low rates.”

However, organic needs may trump the financial rewards of extremely low rates, he said.

“People will still get married, people will still get divorced, people  will have children or will change jobs,” Yun said. “People will need larger homes, regardless of what happens to mortgage rates.”

Still, people will loath to give up unbelievably low rate and many will stay put, unless their wages rise enough to offset higher mortgages, he said.

Indeed, one reason that rates are so low is because the economy is still relatively weak, as well as the turmoil in places such as Greece and Spain, which sends investors to the safe haven of U.S. Treasuries, keeping long-term rates depressed.

“I do think real income, not inflation-adjusted wages, will rise enough to offset losing these low rates,” Yun said.  said. He noted that these super-low rates can’t last forever.

“If incomes do not rise, but interest rates do, than the home sales market will stagnate,” Yun said. “People will not be as willing to move-up, if it means losing their attractive interest rates.”

Does he worry about about housing demand evaporating with rising rates?

“Yes, I do,” Yun said. “But as far as a long-term concern, I would say it is a moderate fear. I think history shows us that as the economy improves, real income, over time, does rise and that will offset the locked-in effect.”

Have a story idea or real estate tip? Contact John Rebchook at JRCHOOK@gmail.com. InsideRealEstateNews.com is sponsored by Universal Lending, Land Title Guarantee and 8z Real Estate




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John Rebchook

John Rebchook has more than 30 years of experience in writing and communications. As the Real Estate Editor for the Rocky Mountain News, he wrote about residential and commercial real estate for 26 years. He has won numerous awards for business stories and columns that he wrote, both as an individual and part of teams. In addition to real estate, he also covered economic development, banking and financing, the airlines, and cable TV for the Rocky. In addition, he was one of the original freelance writers for GlobeSt.com, covering commercial real estate for the Internet publication.

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