The Biggest Story of 2017: Will Rising Mortgage Rates Stunt Chicago’s Housing Market?

lincoln-park-zoo-holiday-lions-2014

The last time we chattered about rising mortgage rates it was 2013 and 2014.

But then mortgage rates dropped again in 2015 and were a non-issue until the November election, which saw a quick spike higher.

Suddenly, the average 30-year mortgage rate is sitting at 2-year highs around 4.3%.

Many buyers were caught off guard, but those actually looking should have had their mortgage rate locked in.

From the Washington Post:

Several sources of data suggest that buyers are paying more attention to the threat of higher rates. The number of mortgage applications submitted this fall was about 20 percent higher compared with the same period a year ago, according to the Mortgage Bankers Association, an industry group. That could reflect the fact that more people are looking to buy even after the busy summer season. The number of home tours requested in October by users of the real estate Web site Redfin increased 34 percent compared with the same time last year.

But while some are moving more quickly to buy, others are feeling as though an opportunity may have passed.

Kradak Thomas, a 43-year-old chemist living in Potomac, Md., said he and his wife had recently considered moving their family to Virginia for a shorter commute. But moving from their home, where they have been for seven years, would have meant giving up a 3.25 percent mortgage rate.

The higher rates now mean they would need to find into a less expensive, potentially smaller home in order to keep their monthly mortgage payment about the same. So they have decided to stay put.

Heading into early 2017, those locks should either turn into actual sales or many buyers will have higher mortgage rates by January and February.

Here’s the history of January and February sales in Chicago since 2013 with the corresponding average 30-year fixed mortgage rate (as per the Illinois Association of Realtors):

January:

  • 2013: 1521 sales – rate of 3.4%
  • 2014: 1383 sales – rate of 4.46%
  • 2015: 1348 sales – rate of 3.6%
  • 2016: 1363 sales – rate of 3.87%

February:

  • 2013: 1411- rate of 3.49%
  • 2014: 1361 – rate of 4.32%
  • 2015: 1497 – rate of 3.68%
  • 2016: 1528 – rate of 3.6%

February 2014 was the polar vortex and near record winter snowfall winter. Was it the weather or the higher mortgage rates that caused the February slowdown that month? No way of knowing.

At what level do rising mortgage rates matter to sales?

Is it 4.5%?

5%?

5.5%?

6%?

Never?

And will it matter if salaries/incomes are also rising at the same time?

Or will mortgage rates retreat back into the 3s once again in 2017 making this recent spike nothing but an anomaly?

26 Responses to “The Biggest Story of 2017: Will Rising Mortgage Rates Stunt Chicago’s Housing Market?”

  1. People bought houses when the rates were 12%, 13% or even higher. If you need to buy, you will pay to play.

    VA:F [1.9.22_1171]
    Rating: +7 (from 7 votes)
  2. Rates aren’t going to go much higher, massive resistance levels at 2.75 and 3 on TNX

    VA:F [1.9.22_1171]
    Rating: 0 (from 4 votes)
  3. “Those actually looking should have had their mortgage rate locked in”.

    Spoken like a true renter.

    VA:F [1.9.22_1171]
    Rating: +2 (from 2 votes)
  4. Interesting interplay between the last post and this one. I could see more people motivated to keep properties where they have attractive mortgage rates to rent them out while moving somewhere else and continuing to build equity in their original property. But then you have an abundance of rentals coming on the market in the next few years that could simultaneously prevent them from renting at a price that makes that strategy worthwhile because of the competition from new buildings. It will be fascinating to watch that play out.

    I know, personally, we refinanced recently after buying just last year. Got a rate at 3.55% and our new appraisal showed that our value went up 13.6% in that year. If it continues to appreciate (I don’t expect it to continue at that pace since we put some work/money into it to get that appreciation) and we have a lower rate than what people can get in a few years time, I’d be inclined to hold onto the asset and build equity even if I can’t get rent that would cover my mortgage costs, taxes, and HOA. It might be worth it to me to pay a few hundred a month to cover the shortfall while building that equity and letting the property appreciate.

    VA:F [1.9.22_1171]
    Rating: 0 (from 2 votes)
  5. ” Got a rate at 3.55% and our new appraisal showed that our value went up 13.6%”
    “even if I can’t get rent that would cover my mortgage costs, taxes, and HOA. ”

    how is that even possible, unless you cash out refinanced, or put near 0% down?

    VA:F [1.9.22_1171]
    Rating: 0 (from 0 votes)
  6. “how is that even possible, unless you cash out refinanced, or put near 0% down?”

    Didn’t cash out. Put 5% down originally and used the other 5% we had saved (which would have been part of the down payment but for buying a place we wanted to do some work on) to make improvements during the first year.

    VA:F [1.9.22_1171]
    Rating: +1 (from 1 vote)
  7. I refi’d for NO points at 3.75% a few months ago (APR 3.72%) – the lender (a major bank going through some major $hit right now) wanted to make sure that we didn’t cancel the deal and paid all our closing costs, along with waiving a few weeks interest, paying a few months home owners insurance premiums (never seen that one before) and then gave use a few thousand back at closing which we used to pay the first mortgage payment. I’ve never seen a APR be lower than the interest rate but it is what it is.

    VA:F [1.9.22_1171]
    Rating: 0 (from 4 votes)
  8. realistically, higher rates will kill the higher end of the market before it even makes any dent on the lower end; the two major reason being that in absolute dollar figures, a higher rate on a higher balance is more money than a higher rate on a lower balance; and half the market, by definition, is below median cost homes. and secondly, the lower end of the market is not interest rate conscious. They don’t care about much of anything. Just look at the stupidity consumers engage in at the retail level. 75 month loans, high interest rates, worthless warranties, some of them even buy the life insurance printed on the contract! Few if any of these low information buyers are suddenly going to back out a Dunning or Belmont Gardens or Crystal Lake home purchase because interest rates creep up a few % of a point. The reality is that all you need to qualify for a mortgage today is:

    1) a steady job;
    2) a credit score from one buyer that starts with a ‘6’;
    3) a downpayment the size of an average federal tax refund.

    I’m not joking, you can buy and move into the home of your dreams in the next 45 days if you have these things. They’re giving mortgages to people who’ve had multiple foreclosures in the recent, because FHA guidelines say you only need to wait something like 2 years since the previous foreclosure before qualifying for a new mortgage. These same people who royally overborrowed in the last financial crisis are the same people out there buying homes now. Today’s first time homebuyers were yesterday’s foreclosures. I’m not joking, this is why the market is so hot again. They’re also the same people who think it’s OK to pay 20% interest for 72 months on a Chevy Cruz because the dealer told them the payment would be under $400 a month.

    VA:F [1.9.22_1171]
    Rating: +9 (from 9 votes)
  9. I refinanced back in June for 3.5% on a 30 year fixed jumbo and they were offering credits as well, I think it was around 2k so all in all it cost me like 300 bucks to refinance and save 200ish a month

    VA:F [1.9.22_1171]
    Rating: 0 (from 0 votes)
  10. The credits I received from the lender covered not only the closing costs but also a shortage in my escrow account related to property tax increases. Had there not been that shortage, I probably would have walked away from the refinance with money in my pocket. HD is right. I have a steady job, a credit score in the 800s, and had equity (though not quite 20%) because of appreciation and lenders were clamoring for me to refinance. I had brokers I had worked with to compare prices during the initial sale calling me to see if I wanted to refinance before I had decided for sure whether to do so.

    VA:F [1.9.22_1171]
    Rating: 0 (from 0 votes)
  11. I’m very tempted to refinance now since some recent expenses have considerably diminished my cash reserves. I was thinking of doing a 20 year fixed and taking about $20k out to replenish my reserves. How did you end up getting these credits to cover closing costs? I have just barely started looking, but everything I see online indicates that there are closing costs, which I am loathe to pay.

    VA:F [1.9.22_1171]
    Rating: 0 (from 0 votes)
  12. When I originally purchased I went to a couple mortgage brokers, Wintrust and a smaller firm. Then you just make them negotiate against each other until they can’t give you any better deal. Literally get an offer then call up the other broker and ask them to beat it. Rinse and repeat. Same way people should buy cars. Both final offers were better than what I could get from simply searching online.

    Without knowing more, I can’t say whether you’d get a credit to cover all of your closing costs, but I think that would be the best way to find out.

    VA:F [1.9.22_1171]
    Rating: +1 (from 1 vote)
  13. ” Literally get an offer then call up the other broker and ask them to beat it. Rinse and repeat. Same way people should buy cars”

    Speaking from someone who just purchased a new car, those guys will rip you off anyway you can. In fact, they get angry with you and act offended when you push back at getting ripped off. They can’t just let you buy a car, get a reasonable trade in and walk out with a reasonable interest rate. No, they have to lie to you for hours about what rate you qualify for (despite having a smart phone in your hand looking up rates); they lie about the trade in value of your car, they try to sneak in extras on the final contract that you didn’t ask for. I’ve seen hundreds of car contract over the years and those guys do everything they can to screw you anyway they can. I feel so bad when I see people walk out of dealerships getting ripped off, which unfortunately, happens to even the best of us who are vigilant.

    VA:F [1.9.22_1171]
    Rating: +1 (from 1 vote)
  14. “How did you end up getting these credits to cover closing costs?”

    They just had happened to be offering them at the time, probably as incentive to get people to refinance (although the rock bottom rates were already incentive enough for me) the company I work for has a loan origination department and we get really good deals from them. The company I wound up actually having the loan sold to was Scotttrade bank (that’s not the company I work for)

    VA:F [1.9.22_1171]
    Rating: 0 (from 0 votes)
  15. why you buying new cars, Rockafeller?

    VA:F [1.9.22_1171]
    Rating: +2 (from 2 votes)
  16. “I feel so bad when I see people walk out of dealerships getting ripped off, which unfortunately, happens to even the best of us who are vigilant.”

    Yeah, with a new car, it’s so easy to play dealers off each other to cut away the fat and get the best deal they can give you. The cars are the exact same. You can do it mostly over email or phone at that point. Tell them you want X car with Y features and ask what the best price they can give you on it. They just email or phone a couple other dealers and ask them to beat that price.

    Arrange your own financing before you step into the dealership. That way, when you go to sign the paperwork, there is nothing to negotiate over. At some point, they’ll get to the lowest price they can give you.

    A trade-in complicates things a little. Probably have to actually visit the dealerships to get a quote for the trade-in. But then you can go home and do the rest of the negotiating over the phone or email. Now you just have two areas where the dealerships can try to beat each other.

    People nowadays hate confrontation and somewhat uncomfortable face-to-face interactions so they just accept the first or second offer to their detriment.

    VA:F [1.9.22_1171]
    Rating: +1 (from 1 vote)
  17. “…Speaking from someone who just purchased a new car, those guys will rip you off anyway you can….”

    I highly recommend Carmax/Kenosha (Toyota/Scion & huge used car lot). First in a completely separate transaction they paid $2K for my nearly worthless car w/200,000+ miles (odometer’d quit counting)*. I returned later & purchased a car for vg price on window financed by Carmax on straightforward terms. Also Costco provides great deals on cars.

    * fwiw – I rec. received collection letter claiming I owe City of Chgo $3K. Turns out car I sold Carmax was resold & new owner drove it w/o re-titling or licensing (posted altered ‘lic. applied for’ form). Car was towed and Streets & San concluded I owned it. I never received any notice of Streets & San’s kangaroo court hearing. After being dunned I complained and produced receipt of sale & copy of title transfer document. Within a week Streets & San reversed its verdict. Happy New Year all!

    VA:F [1.9.22_1171]
    Rating: 0 (from 0 votes)
  18. Shouldn’t Carmax have taken care of that for you? The biggest reason I will never sell my car myself is because of issues like that.

    VA:F [1.9.22_1171]
    Rating: 0 (from 0 votes)
  19. jenny asked “Shouldn’t Carmax have taken care of that for you?…”

    Imo Carmax took my formerly owned car & my signed over title (w/assignee left blank) to an auction & resold it, most likely to a lot on Western or Cicero that specializes in selling p.o.s. cars (w/financing) to poor people who can’t afford reliable cars. So Carmax was never in chain of title. I’m ecstatic I could find my paperwork and reverse the verdict.

    VA:F [1.9.22_1171]
    Rating: 0 (from 0 votes)
  20. Fwiw: A few years back a buddy who’s ‘real police’ pulled over a driver of p.o.s. car with its lights hanging out of rusted fenders & many other issues. He asked its driver wasn’t he embarrassed to be seen driving such a p.o.s. to which he received a priceless response: “Officer, drivin’ a raggedy ride beats a proud walk seven days a week in my book”! That greatly humored my friend which warded off any ticket(s) for ‘raggedy ride’ driver.

    VA:F [1.9.22_1171]
    Rating: +1 (from 1 vote)
  21. My last car I bought by email. There is no way I would ever buy another car through a floor sales person at a dealer. I emailed many dealers. I compared prices and negotiated the best price for the most options. Arranged my own financing before going to the dealership. No trade-in. No extras. No extended warranty, rust-proofing, or dealer installed stuff. I paid the email price and no more.

    When I sell my cars privately, I fill out the title assignment myself. There is no way that I’ll leave the assignee blank. And I fill out a standard form sales receipt: exactly what was sold, by who, to who, for how much. I’ve needed that receipt a couple of times.

    VA:F [1.9.22_1171]
    Rating: +4 (from 6 votes)
  22. Any currency exchange can handle the title transfer for you assuming you actually own the car free and clear and have the title in hand. I would never entertain a trade in – – you guys talk about car dealers ripping you off yet you do trade in deals with car dealers? Right now I have a five year old car in pretty excellent condition. I own it free and clear. Kelly blue book value says it is worth about $15K-$18J. Dealers sell “certified pre-owned” versions in the $20K – $25K range. I have gotten a trade in offer from the dealer I take it to for oil changes, in the $7.5K range. No kidding.
    I have always sold my own cars. It takes just a tiny bit more effort but it is worth a significant amount of money.

    VA:F [1.9.22_1171]
    Rating: +1 (from 1 vote)
  23. It’s not really that salaries across the board are rising but the 100k-300k bracket is seeing many more jobs. Loop inventory is down ~40% YoY. Now the Yuan reset has begun for the New Year, Chinese buyers will rev it up over the next few months, getting in what they can before capital controls get tightened up further. Anyone that is looking to illegally move greater than the 50k yearly limit has until July to do so before China’s new bank reporting rules kick in.

    If you own property under 1m you’ll enjoy some further price appreciation this year. The 1m+ market is looking like a glut.

    VA:F [1.9.22_1171]
    Rating: 0 (from 0 votes)
  24. “Got a rate at 3.55% and our new appraisal showed that our value went up 13.6% in that year. If it continues to appreciate (I don’t expect it to continue at that pace since we put some work/money into it to get that appreciation) and we have a lower rate than what people can get in a few years time,”

    Thanks for the update Kevin. This is the first comment I’ve seen in a couple of years on this site where someone sounds giddy for how fast their property is appreciating.

    13.6% is great- and prices have gone up- but Chicago has averaged 3-5% appreciation for the last 50 years. So what we’re seeing now in the GreenZone neighborhoods is way out of the norm.

    Has it been juiced by the low rates? Probably.

    But what happens when it reverts back to 3-5%? It inevitably will.

    Also, if the stock market continues to do what it’s been doing the last 8 years, people will eventually figure out that stocks are a much better “investment” than real estate.

    VN:F [1.9.22_1171]
    Rating: +1 (from 1 vote)
  25. “People bought houses when the rates were 12%, 13% or even higher. If you need to buy, you will pay to play.”

    Of course they did. But what were the prices?

    We are a monthly payment nation. In order to get that $2000 a month housing payment the price would have to plunge quite a bit with a 12% mortgage. Cheap money has raised the prices of all asset classes.

    VN:F [1.9.22_1171]
    Rating: +2 (from 2 votes)
  26. “13.6% is great- and prices have gone up- but Chicago has averaged 3-5% appreciation for the last 50 years. So what we’re seeing now in the GreenZone neighborhoods is way out of the norm.”

    Agreed, but it also seems misguided to judge returns on a city-wide basis when we all know that real estate is such a local thing. I certainly don’t expect that kind of return to continue (and as I mentioned, a decent amount was driven by improvements we made after we bought) indefinitely, but certain neighborhoods are undoubtedly experiencing their moments of out-pacing the larger Chicago-area market as a whole. Seems like we bought in the right neighborhood at the right time.

    “Also, if the stock market continues to do what it’s been doing the last 8 years, people will eventually figure out that stocks are a much better “investment” than real estate.”

    Still gotta live somewhere though, right?

    VA:F [1.9.22_1171]
    Rating: 0 (from 0 votes)

Leave a Reply