PITTSBURGH – After renting a two-bedroom unit for four years in a Pittsburgh suburb, Andy and Sarah Hadad decided the time had come to invest in a home where they could raise their 3-year-old daughter and build equity for their future.
Another deciding factor? The couple began to see mortgage rates moving higher. They breathed a sigh of relief when their lender was able to lock the interest rate on their 30-year mortgage at 4 percent.
“We know we will probably never see interest rates like this again,” said Hadad, 28, a quality assurance engineer for a software company.
Average 30-year mortgage rates in June jumped to their highest levels this year, topping 4 percent for the first time since late 2014. The Washington-based Mortgage Bankers Association forecasts rates rising to about 4.5 percent by the end of 2015 and rising further next year.
The refinance boom that was in full steam when rates were much lower in the first half of the year is likely coming to an end. But the banking trade association expects a growing number of consumers to dive into the home buying pool in the months to come.
“We expect that purchase mortgage originations will increase to $730 billion in 2015 from $638 billion in 2014, driven higher by the stronger job market, increases in home prices and declining share of cash purchases,” said Mike Fratantoni, chief economist for the Mortgage Bankers Association.
“The increase in rates will be a bit of a headwind for purchases,” he said. “But the increase in household incomes from the tighter job market will more than offset the higher rates.”
The Federal Reserve has been planting strong hints that it will raise interest rates this year. There is strong speculation that the current near-zero interest rate on federal funds – the rate that banks loan each other money overnight – is set to rise in September.
Since other interest rates – like credit card, mortgage and CD rates – are based on the federal funds rate, an increase by the Fed likely will lead to rising rates in bond markets and throughout the banking system.
Staci Titsworth, regional sales manager for Pittsburgh-based PNC Bank, said it makes more sense for people who want to buy a house to do it sooner rather than later in a rising interest rate environment.
“Higher rates will make it tougher for first-time home buyers because their affordability decreases,” she said. “Everything is tied to how much a home buyer can afford. The higher the payment, the lower the loan amount.”
Housing and mortgage expert Michael Sichenzia, based in Parkland, Fla., said mortgage rate increases are also connected to uncertainty in the world economy.
“When there is higher risk, you have higher rates,” Sichenzia said. “Future homeowners are the group most likely to be affected by higher rates. If you are a future homeowner, you are in one of the highest risk categories on the risk curve.”
He said first-time home buyers should lock in their interest rate. “Try to get a fixed rate locked in. Mortgage rates today will be cheaper, generally, than they will be six weeks from now. A 30-year fixed rate at 4 percent is basically free money,” he said.
Mortgage giant Freddie Mac began documenting average mortgage rates in 1971 when rates for a 30-year mortgage hovered around 7 percent. By 1981, they had reached a nose-bleeding high of 16.63 percent.
According to interest rate aggregator GoBankingRates.com, by 2003 and 2004, rates had fallen to their lowest average at 5.83 percent, preceding the housing crash, and climbed into the 6 percent range in the following few years after the crash.
Financial adviser Robert Hapanowicz, president of Hapanowicz & Associates Financial Services in Pittsburgh, said mortgage rates will generally track the level of intermediate to long-term bond rates, particularly U.S. Treasury bond rates.
“These rates are set in the bond market, so in this manner the mortgage market and bond markets are connected,” he said. “Interest rates are moving higher because the economy is healthier. The employment picture is much improved and prices are starting to rise at more normal rates.
“Higher interest rates – including mortgage rates – are an initial sign of a stronger economy,” Hapanowicz said.
“Eventually, and at a certain level, however, higher interest rates will be a drag on the economy.”
Hadad and his wife, Sarah, 22, a stay-at-home mom, are thrilled with the three-bedroom, one-bath home they bought last month in the same community they were renting for $149,900.
“Homeownership is fantastic,” Hadad said. “I like having a home to come home to. It’s something you own rather than coming home to a rental.”
Homeownership is also cyclical. The couple’s agent, Mike Netzel at Keller Williams Realty, was the same agent who sold Hadad’s grandmother’s home – the home his father grew up in – 17 years ago.