How Will Mortgage Rates Impact The Real Estate Market And Your Retirement Accounts?

While we may be used to seeing mortgage rates at historic lows, things are in the midst of changing rapidly. For the first time since 2009, the average 30-year fixed mortgage rates are now over 5%, hovering around 5.25%. This is quite a jump in a short period of time. The real question is what does this mean for the real estate market, how far will rates go, and how can you be prepared?

Historical Mortgage Rates

A 5.25% mortgage rate might sound outlandish right now, as we’ve been used to hearing rates that have been historically low in recent history. However, in the past 40 years we’ve seen rates as high as 16% and as low as 3%, which is quite the spread. Since 1971, the historical average mortgage rate has been just under 8% for a 30-year fixed mortgage, which means our more recent lows, and even our current “feels high” rate of 5.25% are still well under that historical average since 1971. Even when we look at more recent memory, say from 2006-2008, the average mortgage rates were around the 6% range.

This is all good reason to remember that mortgage rates do fluctuate, and they’ve been much higher than they currently are now. Even if rates creep up another few percentages, we’d still be below historical averages, which is something to keep in mind.

How High Will Mortgage Rates Go

Ultimately, no one can predict just how the market will play out and where mortgage rates will land. When we think about how much worse rates may get in the near term, many real estate experts seem to think we’d end up around 5.5% by year end. With inflation still sticking around, the Fed will continue to keep ratcheting up rates until they get it back under control. While this doesn’t correlate to mortgage rates exactly, it can be a leading indicator. It may not be out of the realm of possibility to see rates around 6%, or even 6.5% by year-end, due to the rising interest rates necessary to combat inflation. These rates, while higher than we’re used to, are still historically below average.

What Do High Mortgage Rates Mean For The Real Estate Market

With higher mortgage rates, we’d expect to see a hot real estate market cool slightly. Initially, the buyer pool purchasing homes would get smaller as rates increase, since fewer people are able to afford a home at the current asking price due to the increased payment and rate.

This would also result in housing prices to cool slightly as a lagging factor. In the short term, we might see it take slightly longer to sell a home than it has been recently. Longer term, we’d start to see housing prices fall a little. Is this an absolute? No – especially as buyers are resilient, and if unemployment remains low with wage growth on the rise, we may not see as much of an impact.

What Rising Mortgage Rates Mean For Your Investments

What do rising mortgage rates mean for your investments and your retirement accounts? First, if you’re getting a mortgage be aware of the timing. A 5/1 or 7/1 AR AR M (adjustable-rate mortgage) may be a good option as it can provide lower comparable rates to existing mortgages for a fixed period of time, then rates become adjustable. Should you overpay your mortgage if your rates are creeping up? That’s a discussion that you’ll need to have with a financial planner, as it depends on your personal situation, the amount of debt you have, and the amount you have in your retirement accounts.

Overall, with mortgage rates rising, now is the right time to talk with both a financial planner and a mortgage professional to ensure you’ve got a plan in place to ensure your housing and financial needs are both met for the future.

By Andrew Rosen, Contributor