For a while this summer it seemed like everyone expected mortgage rates to climb. However, since a peak in early July, rates have been drifting lower and are back under 4% – less than half their long-term average.
With mortgage rates down from 4.5% a year ago, homebuyers can actually afford 8% more home than a year ago, according to our friends at themortgagereports.com.
It may be hard to believe, but the US housing market is now well into its fifth year of recovery. Home prices across the US are up another 7% over the past year, raising concerns about affordability for cash-strapped home buyers. If rates rise, that concern gets amplified. If mortgage rates fall however, that would provide another cycle of boost for housing demand.
Long-time readers of this blog will be aware of the striking shortage of homes for sale around the country. The low-supply conditions have lead to consistent price gains as demand has gradually increased since January 2011. Today is no different. Rates under 4% add to affordability and marginally add to housing demand.
To be clear, there isn’t a lot of evidence that small changes in mortgage rates change housing demand profoundly. So the last few months of mortgage rate drop are merely adding a check in the bull-market column for US home prices into 2016.
What does this all mean for home buyers? It might cost you more to buy a home, but with low interest rates, you may actually be able to afford it.