Interest rates are rising. What about the rest of the economy?

2017 is going to be brave New Year for Housing in the United States and in Hampton Roads.  There are some unknown economic factors that are yet to be determined but we do know several things that are definitely going to impact prices and the local housing markets.

Interest Rates – They are going up, and it is already happening.  According to Mortgage Daily News[i] rates for a 30 Year Mortgage are at 4.14%.  That’s up from as low as 3.4% in July of this year.  With a rising stock market and a Federal Reserve that needs to get some magic bullets back in their holster to combat future economic crisis.  I don’t think that we are going to see a steep rise but I do believe that we could see rates as high as 5.0% in the next year.

Rising interest rates will have several different effects on local housing markets.  Buyer’s purchasing power is going to decrease.  If a typical family could afford a home payment of $1,500 a month in July they would be able to purchase a home around $335,000 in York County.  Today, that same home buyer would be looking at a home price of $310,000 with an interest rate of 4.14%.  If we hit 5%, that buyer would only be able to purchase a home priced at $285,000.[ii]

Sounds terrible and like a doomsday scenario for housing right?  But this is only one part of the total economic picture.  The stock market is enjoying a Trump rally and the Dow Jones Industrial Average is trading at all time highs above 19,000.  The country is lacking growth which is the key ingredient to our economy.  Since the Great Recession the US Economy has struggled to grow more than 2% per year.  In 1984, real GDP growth was 7%.  A growing economy creates new jobs and allows wages to increase.

When my wife and I were looking for our first home in 1996 interest rates were at 8%.  We had a sense of urgency to buy our first home.  Prices were steadily rising and had been since World War II.  People weren’t worried about losing money on their homes, the question was how much you were going to make.  If you purchased a home in 1996, you knew that each year you were going to get a raise from your employer.  People actually used to receive cost of living raises and merit raises.  Every company was looking for good employees and companies had to stay competitive to keep good workers.

My wife and I knew that if we spent 25% of our monthly income on housing, we could make ends meet but it would be tough.  But we also were comfortable knowing that our income would be rising and in several years our mortgage would only be 20% and then 15% of our income and we would feel “richer”.

Inflation – It kind of works the same way as wages.  Long term debt is one of the few things that allows you to feel good about inflation.  Some inflation is good when you are a homeowner.  Things including housing, food, power, and consumer goods costs more – but your mortgage stays the same.  With a constant costs for housing as a homeowner, the incentive to own a home versus renting a home or an apartment increases.  More people make the decision to buy a home when we have some inflation.

The New Administration – While the full extent of a new administration in Washington has yet to be determined, we have been given a glimpse into the Trump team’s priorities.  Tax reform has been a key topic and cornerstone of the Trump campaign.  He has said that he will be lowering taxes on the average tax payer.  The Trump tax plan proposes a couple making under $100,000 a year would only pay 10% in Federal Taxes.[iii]  This savings in Federal Taxes would easily make up the difference in a 3.4% mortgage rate and a 5.0% rate.

Seniors have felt trapped in their empty nests over the last decade.  I hear repeatedly from seniors that they just don’t feel that the market has returned enough for them to sell their primary residence.  Many seniors look at their homes as their largest single investment for the retirement.  They have worked hard to pay off their mortgage.  When they cash in out on the large 4 bedroom 2 car garage house, they have been planning on buying a smaller house in Florida and spending the next few years traveling on the difference.  As prices rise many Seniors will go ahead and decide to sell.  This should also help the lack of inventory that our market has experience over the last 18 months.

My prediction is that housing mortgage rates will rise in 2017, home prices will also rise next year, and 2017 will end up being a perfect year to make that move up or down.


Michael Reames

Team Leader and Listing Specialist – Reames Realty Group

(757) 871-2146 Direct


[i] http://www.mortgagenewsdaily.com/

[ii] http://data.cnbc.com/quotes/.DJI

[iii] http://www.wsj.com/articles/trump-plan-cuts-taxes-for-millions-1443427200


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