Low Mortgage Rates: Pros and Cons

Many economists had predicted that economic growth would be accompanied by climbing interest rates for 2016. However, despite even recent implications of the Brexit vote in the United Kingdom, economic uncertainty has influenced otherwise.

Contrary to the forecasts, the United States has been seeing some of the lowest mortgage and interest rates since 3 years ago in 2013. The low rates are playing a role in increasing home sales as they arm buyers with more purchasing power. However, “A look at the pros and cons of this recent drop in mortgage rates shows that they may not be as unambiguously beneficial to the housing market as previous low rates have been,” says Danielle Hale, NAR’s Director of Housing Statistics.

Here are some of the pros and cons per Danielle Hale’s recent blog post:

PROS

• This year we have experienced a rate reduction of more than 50 basis points. This drop provides buyers with more purchasing power. The reduction of 50 basis points translates to reducing monthly mortgage payments by $50 per $100,000 in home price.
• The amount of income needed to qualify for a home loan is also reduced by approximately $1,000 due to this decrease.
• When calculating this based off of recent median home price statistics, this means there is a reduction of $2,500 that is needed to finance a home with a 20% down payment.

CONS

• Despite June’s Brexit vote eliciting the decline of mortgage rates along with instilling economic uncertainty, most of the rate decline had actually already occurred in Q1 of 2016. This suggests that many had concerns about the economy before the vote in the U.K.
• The global financial news of uncertainty is making consumers less optimistic about the housing market. This slowdown of global growth may also lead to consumers being skeptical of the effect on the U.S. labor market.
• First time buyers are currently having difficulty locating affordable options due to the slim inventory levels. Others are struggling to accumulate funds towards a downpayment due to high rents and student loan debts. Hale points out that given these challenges, the only ones who are benefitting from the low rates are those who already own a home which is in large part contributing to the gap in wealth in the U.S.

Still, “Thus far, the U.S. economy has proven resilient to the weaker global economic environment,” says Hale. “A stronger U.S. consumer, who benefits from lower financing costs, may help ensure that trend continues.”