Rate Increases Wakes Up the Local Housing Market

The spring buying season starts after Super Bowl Sunday and this year there are more active MLS Anchorage homes for sale than in the past five years. MLS has also reported a 5.89 percent drop in average closed sales price in January to $343,541 which is the lowest in over five years. But, despite the increase in inventory there is less than a two month supply of available homes in that average price range. Overall, Anchorage has only a 2.5% supply of current active inventory. And much of that inventory is above $500,000 which will face challenges in the coming month due to the finally realized increase in mortgage interest rates. In the past, a bump up of interest rates has slowed sales as buyers adjust to what they can afford. However, this increase appears to have had the opposite effect. January pending sales over the past three years are virtually identical at 200. First time homebuyers, on the sidelines or in their parents’ basement, the past couple of years appear to finally be taking the leap to homeownership and downsizers are saying it’s now or never as fear of interest rate creep has finally hit home.

One year ago the VA 30 year fixed rate was 3.75. Today, that rate is 4.5%. Similar increases have occurred with all mortgage programs. A 15 year fixed conventional rate was 3.5% and today’s rate is 4.125%. The popular FHA 30 year fixed rate has jumped from 3.75% to 4.5%. With less than 10% down, FHA loan now also requires mortgage insurance for the entire 30 year life of the loan whereas previously it was cancelled after five years and 78% loan to value. Interestingly enough, conventional rates have not jumped as high. One year ago 30 year fixed conventional was 4.125% and today it is 4.5%. Now, I’m not an interest rate or mortgage bond expert but it appears these rate jump ups hit the entry level and one step move-up market the hardest. I’ve never worried about the conventional mortgage rate as higher end buyers frequently have financial resources that allow them to buy down rates and avoid mortgage insurance by putting 20% down. Here in Anchorage, we are also seeing buyers paying cash for a new home.

What troubles me most about these rate increases is how much more difficult it will be for first time home buyers to qualify for a mortgage and the anticipation that more rate increases will occur throughout the year. I recognize that our historically low rates couldn’t, and shouldn’t, last forever but I also believe that homeownership, which begins at the affordable level, is the backbone of any socially vibrant community. So my recommendation is buy now and lock your loan. There is more inventory in the market, including entry level condos which have remained stable in value, because the cost of home ownership is not the purchase price, but rather your mortgage interest rate over the life of the loan.