In anticipation of the Federal Reserve raising benchmark interest rates later this year, mortgage interest rates have already risen eight consecutive weeks and more hikes could spur a round of foreclosures, especially in more expensive housing markets.
High-end markets typically garner more higher-risk, high loan-to-value mortgages written to give borrowers a more affordable shot at home ownership. These loans are, however, often adjustable-rate and interest-only loans with interest rates and monthly payments that will trend up as the economy improves.
Borrowers who aren't financially prepared for the economy to expand, could discover their wallets aren't big enough to keep pace, says Foreclosures.com, a Fair Oaks, CA-based investment advisory firm specializing in distressed property.
Markets in California, Nevada, Northeast and New England states have the most potential for growing foreclosures.
Interest rates have already risen from this year's average low of 5.38 percent (for fixed-rate, 30-year conforming loans) in mid-March to 6.34 percent the week ending May 13, according to Freddie Mac's Weekly Mortgage Market Survey. Rates took a breather the week ending March 20, settling back to 6.30 percent. Economists predict a 6.6 percent ceiling on rates by year's end.
"There is the potential for trouble ahead. Interest rate increases on adjustable-rate mortgages (ARMs) could trigger a wave of foreclosures," said Orleans, MA-based Marie McDonnell, the Mortgage Counselor, a mortgage expert who audits mortgages loans, counsels consumers and provides expert witness services.
Home Sales, Price Hikes Continue Unabated
The one week drop back in interest rates, albeit small, could further boost home sales, which continues as an economic foundation that's both solidifying consumer confidence and helping keep the recovering economy on course.
Existing single-family home sales closed at the fifth highest level on record with a seasonally adjusted annual rate of 6.64 million in April, up from 6.48 units in March this year, according to the National Association of Realtors.
The whopping 15.1 percent increase over April 2003's sales was just shy of the 6.68 million annual rate posted in September last year.
Fence-sitters may see the rate drop as a hiccup before rates resume their upward march this year and create another record-setting home sales statistic.
"Given the favorable economic backdrop and strong sales momentum, a big number was expected for April home sales and it's likely we'll see another big month in May," said David Lereah, NAR's chief economist.
"Part of what we're seeing now is 'fence-jumping' from people wanting to buy a home before interest rates move higher. Even with an additional rise in recent weeks, the good news is that mortgage interest rates now appear to be leveling-out in the 6.3 percent range."
Home price increases also show little sign of abating, even with a better inventory.
The national median price in April was $176,000, up 7.3 percent from April 2003 when the median price was $164,100. Housing inventory levels at the end of April rose 9.4 percent from March to 2.57 million existing homes available for sale, which represents a 4.6-month supply at the current sales pace.
Shaking Hands With Housing?
NIMBYs (for those with not-in-my-back-yard sentiments) who once brandished "Hell No! We Won't Go Affordable" placards may soon burn in effigy candidates who don't present viable housing platforms with their list of election promises.
Worried their children may not be able to afford to live nearby and that the lack of housing is hurting the economy, a National Association of Realtors' poll of 1,000 adults in the 25 largest metropolitan areas found 76 percent of respondents were supportive of affordable housing in their community, and 63 percent supported it next door.
Neighborhood opposition has long been considered a barrier to cheaper housing, but 69 percent of voters gave their federal elected officials a grade of "C" for not working to improve the availability of affordable housing and two out of three said they would be more likely to vote for a candidate who works to make housing more affordable.
"...More people know about affordable housing problems than we might have thought," said Walt McDonald, NAR president.
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