Effect of rising interest rates unclear on housing market

Effect of rising interest rates unclear on housing market

Realtors in Champaign-Urbana and Danville say it's difficult to tell whether a rise in mortgage rates has put a crimp in homebuying.

"It's hard to get a read," said Todd Salen, president of the Champaign County Association of Realtors. "I do think we were at a record growth rate in May and June, and we're not going to hit those numbers. But I don't know whether the drop is seasonal or how much is affected by mortgage rates."

Heather Cunningham, president of the Danville Area Board of Realtors, agreed it's "kind of hard to gauge" what effect the jump in rates has had.

"I think they jumped fairly quickly, but it's just not something I hear (homebuyers) talking a lot about," she said.

Rates for a 30-year fixed-rate mortgage jumped from the 3.5 percent range to the 4.5 percent range over the last two months — perhaps bringing an end to some of the lowest mortgage rates in decades.

The boost has real consequences for homebuyers.

For someone buying a $140,000 home, the rate increase adds about $50 to the monthly payment, Salen said. Payments would rise from about $710 a month to about $760 a month.

Those figures are calculated on a 30-year fixed mortgage with a 20 percent down payment, he said.

Salen said the rate increase has prompted some homebuyers to speed up their decision, fearful that rates will move higher.

"Some people sitting on the fence are coming off the fence, especially in the over-$300,000 category," he said. "This is incentive for them to go forward."

The market for homes under $300,000 has largely recovered, but until recently, higher-priced homes hadn't fared as well, he said.

But Salen said former University of Illinois football coach Ron Zook's house sold two weeks ago, and "others in that bracket are getting a lot more showings."

Clients are saying, "We need to get serious about that now. This is going to cost us," Salen said.

In the Danville market, Cunningham saw a stronger market during the first half of 2013.

"Year to date, we're up probably 13.5 percent for closed sales than where we were last year," she said.

In June, sold listings were down 5 percent from the previous June, she said, adding "that's not bad."

The average time on the market in the Danville area is 125 days, down from 150 days a year ago, she said.

"Our inventory is lower than what we're seen in the past," Cunningham added. The limited supply has influenced buyers, particularly those who spot a house they want after having shopped a while.

"They like it, they buy it," she said.

Salen wonders what effect mortgage-rate increases will have on younger buyers, particularly if rates climb above 5 percent.

People younger than 35 are used to mortgage rates in the 3 and 4 percent range. "They think they're the norm," he said.

They may not be willing to buy a house if the rate is 5.5 or 6 percent, he said. "When it creeps over 5 percent, nerves may come into play," Salen said.

People over 35 who remember higher rates may not be alarmed by rates in that range, he said.

"They're still looking at those as a great opportunity," he said.

Salen also worries that rate increases may surprise people arranging to have a house built.

"People may arrange to build a house and lock into something. But they may not begin building until next spring and find maybe they're not able to afford that house," he said.

"When it gets to the actual breaking of ground, they could be in for a shock," he said, noting that buyers normally don't get financing until construction begins.

Salen said he is seeing more conventional mortgages and fewer Federal Home Administration, Rural Development and Veterans Affairs loans — an indication that more people are trading up and fewer are first-time homebuyers.

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