For many economists, the predictions for economic growth and rising interest rates have not been coming to fruition since global economic uncertainty was recently heightened by the recent Brexit vote in the United Kingdom this past June.
Contrary to the forecasts, the country is experiencing some of the lowest mortgage rates since 2013. These low rates are helping boost home sales while they provide buyers with more purchase 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:
- In 2016 we have seen a rate decrease by more than 50 basis points. This reduction arms buyers with more purchasing power. This reduction translates to trimming monthly mortgage payments by $50 per $100,000 in home price.
- The amount of income required to qualify for a home loan is also reduced by approximately $1,000 due to this decrease.
- When calculating this off of recent median home price statistics, this equates to a reduction of $2,500 that is needed to finance a home with a 20% down payment.
- Although June’s Brexit vote inspired a decline of mortgage rates while instilling economic uncertainty, rate decline had already occurred in large part in Q1 of 2016. This suggests that many already had concerns about the economy prior to the recent vote in the U.K.
- The news of uncertainty is triggering consumers to be less optimistic about the housing market. The global growth slowdown may also make consumers skeptical of the effect on the U.S. labor market.
- First time buyers are experiencing challenges locating affordable options due to the limited inventory levels. Others are struggling to save funds for a downpayment as rents are high on top of student loan payments. Hale states that given these challenges, the only ones who are benefitting from the low rates are those who already own property 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.”