Effect of rising mortgage rates on future Houston real estate prices (Sugar Land: insurance, houses)

[Htown2013]

By all measures, Houston's real estate is hot, especially in desirable areas of the inner loop, Memorial, and the suburbs of Katy, SL, and TW.

By all measures, mortgage rates are expected to increase over the next 3-5 years, likely by at least 2%. How do you think housing prices will respond to increased mortgage rates over this time period?

Looking at some numbers, a $400k house with 20% down on a 30 yr fixed would have a monthly PI of $1621. PITI would be much higher, but I'm just considering PI for comparison.

Let's say you want to buy that same $400k house but rates are 6.5%. The PI jumps to $2023. The monthly payment is $400 more a month for 30 years, assuming no further appreciation.

Assuming moderate appreciation over the next 4 years, let's say the house is worth $450k. With 20% down on a 30 year fixed at 6.5%, we are talking a monthly PI of $2275. That is $650 more a month than if buying the same house today, excluding differences in taxes & insurance.

With more aggressive appreciation to $500k and 6.5% interest, the monthly PI skyrockets to $2528, over $900 more than buying today.

To have the same monthly PI of $1621 on a 30 year fixed at 6.5%, you would need to put an additional $70k down if the house did not appreciate at all. If the house appreciated by $50k, you would need to put an additional $120k down and so forth.

Looking at the numbers, the higher interest rates will substantially impact housing budgets. I have a hard time believing rising interest rates will not put downward pressure on housing prices, but I may be wrong. I am particularly interested in the Sugar Land market. What are your thoughts?

[predatorprey]

You're right if interest rates rise it would dampen the housing market significantly.

That being said, I believe we're in someways in a "liquidity trap" similar to what Japan has experienced for the last 30 years. An economy that is so weak that any raise in interest rate would cause the economy to tank. Therefore the fed is forced to maintain low rates in hopes to prevent a recession.

[haudi]

I see interest rates rising maybe to the 5% mark perhaps within the next few years, but 6.5? I just don't see it given current economic factors.

[gwarnecke]

In general, I'd expect less-expensive, "starter home" neighborhood values to be hit more by a bump in interest rates than higher-end areas where buyers are more likely to be paying cash. Nicer parts of Sugar Land shouldn't fare too badly.

[Rip808]

^Agreed. A lot of people from out of state are paying cash, and some folks here in Houston moved from brand-name communities like (Cinco Ranch, The Woodlands, Bridgeland, etc) and moved right next door to "piggie-back" neighborhoods (same schools) and either paid cash or significantly reduced what they owe on their houses. But with the way that things are going now a days, the piggie back neighborhoods are appreciating rapidly. Here in Silver Ranch (South Katy), base prices for homes have jumped up a whopping 25% in one year!

[Augiec]

Wow, I'm inside the loop & I don't think the prices in my neighborhood have risen 25% in one year. I'll bet it's nice till the property tax bill comes in.

[Lowexpectations]

Houston housing is still more affordable than a lot of the US so the negative impact will be less proportionally. Also the market can bear rising rates so long as it is not a fast move, it possible for values to reman stable as rates creep up.


Why people look to a 30 year fixed mortgage baffles me some when most do not stay in their house or keep their mortgage past 7 years or so

[Schumacher713]

It will not change much inside the loop. There is just such a limited supply. Interest rates won't do anything. If you can afford a 500-1mil house. You can afford a little more interest.

[JohnStein]

There is a general inverse relationship between rates and home price. But it'll take a big leap before you see any effect of that relationship. Like others mentioned, supply is limited (in certain areas), and it'd be hard for the rates to shoot up to 6.5% or higher in the short term especially when there are so much money in the system. Equity is in all time high, if the stock market corrects itself, i'd not be surprise to see rates back to high 3%.

[Lowexpectations]

Originally Posted by Schumacher713

It will not change much inside the loop. There is just such a limited supply. Interest rates won't do anything. If you can afford a 500-1mil house. You can afford a little more interest.

It's foolish to say rates won't do anything, certainly they could put downward pressure on inner loop properties. On 500m-1mm properties would certainly lose a lot of buyers if rates went up 2 points and values stayed the same