The final report for 2013 from Freddie Mac on mortgage interest rates indicated that rates, while still historically low, have moved higher throughout the year and, for some analysts and economists, are reason for concern in the new year.
The average rate on a 30-year fixed rate mortgage finished the year at 4.48 percent. That compares with a rate of 3.35 percent at the beginning of 2013.
Mortgage rates are a component in determining affordability, especially in higher-priced markets such as San Diego County, and any increase reduces the ability of some potential buyers to qualify for a loan. As a result, sales activity slowed in the final weeks of the year.
“Home sales are hurt by higher mortgage interest rates, constrained inventory and continuing tight credit,” said Lawrence Yun, chief economist for the National Association of Realtors.
For many potential homebuyers, the mere prospect of higher interest rates is affecting their decision to own a home. And the announcement earlier this month by the Federal Reserve to begin tapering -- reducing the amount of monthly bond purchases from $85 billion to $75 billion -- caused interest rates to change.
Mike Fratantoni, vice president of research and economics at the Mortgage Bankers Association, said following the Fed decision, “Mortgage application volume dropped with rates increasing and refinance application volume falling to its lowest level since November 2008. Purchase application volume was weak, too, continuing to run more than 10 percent below last year’s pace.”
While tapering has the potential to raise interest rates across the board and in the mortgage market, the Fed has attempted to make it clear that rates -- at least on the short end of the rate spectrum, chairman Ben Bernanke and his likely successor, Janet Yellen, have repeatedly said -- will stay low, likely well into 2015.
Yellen, who currently serves as vice chairman at the Fed and is slated to replace Bernanke at the end of January if her nomination is approved, reiterated her support of Fed policy to keep inflation low and, accordingly, interest rates, as well.
“Tight mortgage credit conditions are continuing to make it difficult for many families to buy homes, despite record-low mortgage interest rates that have helped make housing very affordable. I’m encouraged by recent improvement in the residential sector,” Yellen said in a speech earlier this year.
As mortgage rates have edged higher in recent months, there has been a corresponding drop in affordability. The California Association of Realtors reports affordability has dropped for six consecutive quarters, affected by not only rising rate but also higher home prices.
Statewide, homebuyers needed an annual income of $89,170 in the third quarter of 2013 to qualify for the purchase of a median-priced home of $433,940. CAR says 32 percent of households had sufficient income to qualify, down from 49 percent from a same quarter a year earlier.
In San Diego County, only 27 percent of households have enough income -- $99,670 -- to afford to buy the median-priced home of $485,040.
“Buyers are playing the waiting game and putting their home search on hold until prices stabilize and more inventory becomes available in the market,” said Kevin Brown, president of CAR.
With new home construction activity still way below demand, it could be quite a while before more homes become available, especially to first-time buyers.
“Simple economics tell us that San Diego County should be producing more than 10,000 housing units annually. Since 2007, the average production has been about half that figure,” said Alan Nevin, director of economics and market research for Xpera Group, in his 2014 forecast.