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Rising mortgage rates make housing affordability more difficult > Spokane Journal of Business

Rising mortgage rates make housing affordability more difficult > Spokane Journal of Business

Some real estate professionals here say anticipated increases in mortgage interest rates this year could price median-income homebuyers out of the market, while others say they don’t anticipate immediate widespread disruption in the current market.

According to Vic Plese, a broker at Plese Realty LLC of Spokane, borrowing will become more costly as interest rates rise.

“It’s going to push some people out of the market completely,” he says. “It’s going to lessen what some people can pay. My concern is it’s going to affect real estate values at some point.”

Plese said that homebuyers who earn the median income in Spokane are eligible for loans for homes valued between $290,000. and $300,000. Plese says that rates can rise by 0.5% per cent, from 3.5% to 4.5%, and that buyers must have a 5% downpayment. This would add $105 to their monthly payments, or nearly $40,000, to their loan. A one percentage point increase would push the payment up by $214, which would add almost $80,000 to the loan’s total cost.

“I think it’s definitely going to affect what people can buy,” Plese adds.

According to data from Spokane Association of Realtors, the December median price of homes sold in Spokane was $390,000. According to the U.S. Census Bureau, Spokane has a median income of just $57,000. 

A person earning the median income in Spokane often won’t qualify for a loan for a home at the median price here, Plese says.

Spokane-North Idaho regional president Steve Utt at Washington Trust Bank says that the Federal Reserve wants inflation to be controlled by raising rates to cool down residential real estate and consumer spending.

He claims that rising costs for food and gas have outpaced gains in worker wages.

Utt says there’s a lot of uncertainty regarding how high rates could climb, and there’s a chance rates may not change at all this year.

He believes that another health care crisis or black-swan event could impact the economy and potentially stop rates from rising.

A black swan is an event that can be unpredictable and often devastating and has a significant impact on the economy at a global level.

Nicole Shea, vice president and Spokane Valley residential real estate manager at Mountain West Bank, says a purchaser’s buying power will be impacted by interest rate hikes, although rising home prices also have contributed to the decline in affordability in the local real estate market.

Shea states that borrowers should be more concerned by rapid home price growth than a gradual rise in the federal rate.

Since March 2020, federal rates have ranged from 0% to 0.255%. Shea explains that if the federal rate increases by one percentage point, it means that the average rate for mortgages will rise to approximately 4%. This is still an historically low rate.

Shea stated that she expects the rate increase to be gradual and will increase by 1% this year, regardless how often rates rise.

Jordan Tampien, co-founder of 4 Degrees Real Estate, says he expects interest rate increases will decrease the amount of home a person can afford to purchase, which in turn will help to slow home price increases in Spokane’s market.

Tampien adds that there are a lot of out-of-town cash-paying homebuyers who won’t be financing a mortgage and therefore aren’t affected by rising mortgage rates. Consequently, rates likely won’t have a huge net effect on the local real estate market, he stays.

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Kiemle Hagood vice president and director of brokerage Casey Brazil concurs with Tampien and says the short-term outlook likely won’t show an immediate impact from rising interest rates due to the amount of cash currently flowing in the homebuyer market.

Brazil claims that rising rates will lead to an increase in financing costs over the long-term.

While a rise in mortgage rates could affect consumers’ buying power, it could be at least partially offset by an increase in the inventory of homes for sale.

Plese explains, if people think there’s a chance they could lose a drop of their home’s worth in the next year, they may consider selling as soon as possible, which will add to the local housing inventory. If buyers have more options and there is more inventory, then it could mean that there is less competition for homes. This will likely result in fewer bidding wars, which could lead to a decrease in home prices.

Mountain West’s Shea says she’s seen inventory levels slowly creeping upward, but homebuyers will still face low inventory of homes priced at less than $400,000.

“Under $400,000 is where we have competing offers and people trying to get in on their first home. That’s where it’s a challenge,” Shea contends.

Compared to historic interest rates, Shea says, “We’ve been living on the very low end of the scale for a while.”

Regarding anticipated incremental rate increases, Shea adds, “They will still be great rates.”

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