RealtyTrac's Peter Miller weighs in on how the real estate market, as currently constituted, could hit a big speed-bump once interest rates do finally begin to rise again.
So far this year, home values have risen and sales have increased, while interest rates have stayed below 4% (the average rate over the past 40 years has been 8.6%). The Federal Reserve Bank has consistently talked about raising interest rates, and while many in the real estate industry feel it would be a non-event, Miller wonders if we're understating the threat:
The principle here is always the same: Given a particular debt-to-income ratio any increase in defined costs such as student debt, auto financing, credit card bills, property insurance or property taxes reduces the dollars available for principal and interest.Going further, a higher interest rate is simply a cost with the same impact; it limits the ability of the borrower to qualify for financing. Not only is this a problem for marginal borrowers, it’s also a problem for sellers because suddenly their pool of potential purchasers is smaller so they may have to lower their asking price.