Editor’s note: This is the first of a two-part Perspectives on Personal Finance series on mortgages.
Rising rents are giving more Americans the itch to buy.
This new demand may fuel a fresh wave of first-time homebuyers in 2015, as the U.S. economy has continued to strengthen and add jobs. Although home mortgage rates remain at historically low levels in Q1 2015, many would-be homebuyers are well aware that shifting winds at the Federal Reserve could mean higher rates are right around the corner.
"Rents have been rising and rising," said Lawrence Yun, chief economist at the National Association of Realtors (NAR). Rent prices had increased 3.4% over year-ago levels at the end of 2014, "which is almost double people's wage growth. That means renters are getting squeezed and some want to convert to ownership," he said.
Potential buyers are feeling more secure about taking the leap.
"Nearly three million net new jobs were created in the last 12 months, and that provides income for families and the confidence for making long-term decisions," Yun said.
Just How High?
In early 2015, average 30-year fixed mortgage rates are hovering around 3.79%. But Yun predicts rates will rise throughout the year. He pegged 30-year mortgage rates at 4.0% in Q2, 4.3% in Q3, and 4.7% by the time the final three months of the year roll around. Looking out to 2016, Yun and the NAR believe average 30-year rates will be just north of 5%.
There are two main reasons why interest rates may rise in 2015. The first is the widespread expectation that the Fed will start to raise interest rates via its main policy tool this summer. "That will be a signal for the rest of the market for rates to go higher," Yun said.
Second, a strong economy is likely to push money out of the typically safest asset—the bond market—into stocks and other investments. As bond prices drop, their interest rates go up.
Although rates look to be heading higher, this year could usher in a phase of easier access to credit and mortgages, even for those with less than stellar credit scores.
"In 2015 things will be better for those trying to access mortgages, whereas last year it was overly stringent. Mortgages have only been available to people with exceptionally high credit scores. Lenders were not willing to take the risk," said Yun.
"Since the Great Recession, credit scores needed for mortgages approvals were very high. The average credit score approved by [mortgage agencies Fannie Mae and Freddie Mac] was 760. Historically, it should be closer to 720," said Yun.
For 2015, "Fannie and Freddie have indicated they are willing to buy mortgages from people with slightly lower credit scores," Yun said.
All told, the home-buying climate should be buyer friendly this year. Even if rates do ratchet up, it’s important to keep some historical perspective, as mortgage rates are still hovering just above all-time lows. In 2014, the average 30-year fixed rate mortgage rate stood at 4.17%, less than a full point above the all-time low of 3.66% in 2012, according to Freddie Mac data back to 1971. Fifteen years ago, rates were just north of 8%.
"Even 4% is historically a super-low mortgage rate. Even a small upward tick should not dampen the housing market recovery," said Yun.
Watch for Part 2: Actionable tips for moving quickly through the mortgage approval process.