|Fall Real Estate 2003
Publication Date: Wednesday, October 8, 2003
Mortgage rates head up
by Sharael Feist
The American dream: get married, have two kids, a dog, and buy a house with a white picket fence. Owning a dream home might be fading for some interested buyers due to the recent rise in mortgage rates. While others, who had been sitting on the fence about making a purchase, seem to be jumping off and buying before the rates get even higher.
Although it seems likely that the increase would force buyers
to invest in a smaller home, look into less desirable areas, or
buy a townhouse or condo rather than a detached home -- that doesn't
always seem to be the case.
"There has been an influx in purchases," said Catherine Ballantyne,
mortgage broker for Absolute Mortgage Banking in Palo Alto. "This reflects
that buyers who were previously undecided are buying."
This was the case for Rick Caruso, a stock trader working in Mountain View. He started looking for a home in June but didn't end up buying until August, after the rates increased significantly.
"I decided it was time to pull the trigger," Caruso said. "If
the interest rates would have risen too much it could cost us $200 more
per month, which would be taking food off our table. We had to come up with
According to Absolute Mortgage, in early June the rate for a 30-year fixed loan
less than or equal to $322,700 was 4.875 percent, compared to 6.0 percent in
early September. Between $322,701 and $1,000,000, the 30-year fixed loan was
5.5 percent versus 6.5 percent in September.
This means that a buyer with a $500,000 loan would have paid a monthly mortgage
of $2,291 in June with a 5.5 percent rate, but would now be paying $2,708 a month
with a 6.5 percent interest rate. By not making the purchase a couple months
sooner, a buyer could potentially have to pay more than $400 more per month to
own a home now.
Although Ballantyne feels that the impact of rising mortgage rates
could cause buyers to qualify for less and force home prices in
the Bay Area
to fair value, she said, "Palo Alto is a microcosm -- people
are not as apprehensive. Deflation will take a while to take effect."
Ballantyne also states that a large percentage of buyers are looking
for "fixer-uppers" so
they can build more equity, which could offset the deflation of
the home price. She also points out that although condos or town
with the higher interest rates, they don't appreciate as much and
therefore might not be as attractive to some buyers who are able
to afford less.
"Relative to the last 10 years, 6 percent is still cheap," Gerlach
said. "In 1981-82 it was at 12-18 percent. Buyers are still
trying to go for the best value; not go for less. There has been
the demand (for real estate) is still strong."
Ray Hixson, a 35-year-old employment lawyer at Fenwick and West in Mountain View,
purchased a four-bedroom home in early August for more than $800,000 with an
interest rate of 5.75 percent.
For Hixson, the rise in mortgage rates wasn't a factor. He would have bought
the same house even if it meant paying a higher rate, he said. After he was notified
in July that the owner of the home he was renting was going to sell it, he decided
to purchase his own home rather than moving into another rental.
Originally from Tennessee, in 1997 Hixson purchased a four-bedroom home there
for about $100,000. He moved to the Bay Area in 1998 and believes that paying
nearly a million dollars for the same size home here is well worth it.
"It's more expensive here, but it's a great place to live," said Hixson, "due
to the weather, the businesses to work for, the outdoor activities
like Tahoe, the beach, the wine country, the City, and also pro sports. You
only live once. You have to be happy."
As for the sellers, things aren't moving as quickly as some of them would like.
Ballantyne said that homes are not selling as fast as they have in the past and
the time on the market is increasing.
"With a house that has been sitting, people's perception is 'What's wrong
with this house?'" she said.
She also mentioned that in 2001 buyers were offering more than the asking price
and homes were moving faster. However, now she sees an increase in inventory
due to people selling their homes because they are either being priced out of
the area or because of the sluggish economy.
Stephen Levy, director of the Palo Alto-based Center for the Continuing Study
of the California Economy, said that if the mortgage rates continue to rise and
if there is not an increase in job growth, the prices of houses will decline
within the next six months.
"Housing prices here have been held up on the hope that the economy will
recover," said Levy. "Normally when there is a decrease
in jobs, there is a decrease in the price of homes."
Probably the biggest impact of the rise in mortgage rates has been in refinancing.
Carl King, mortgage broker for Mayfield Mortgage in Palo Alto, said refinancing
is on the decline.
"In mid-June, the majority of borrowers could refinance, but now it makes
sense for less than 30 percent of homeowners to do so," he
said, adding that shorter-term loans haven't been affected as much.
"Buyers on the edge of qualifying are using shorter-term loans for lower
monthly payments," he said.
So, it seems as though for most buyers the American dream is still achievable. They just might have to do without the white picket fence.