It’s no surprise that the trajectory of interest rates is a hot topic in today’s economy, particularly in a red-hot housing market. Prices are near all-time highs, inventory remains far short of healthy levels and demand for homes is strong. As the fed taps the breaks on the economy, the implications of rising mortgage rates will be uneven. Markets at the top of this list will see a sizable number of households that will no longer qualify for a median-priced home if interest rates move from 4.5 percent to 5.5 percent. At the other end of the spectrum, interest rates will have a limited impact on the number of households that are no longer able to qualify for a home.
What does this mean for investors?
The markets at the top of this list will have the greatest number of renters remaining in the buyer pool, making them attractive targets for investors from a tenant-demand perspective. In addition to analyzing how many would-be homebuyers will soon be left behind by the housing market, investors all need to balance purchase decisions by potential returns. Chicago, Atlanta, Dallas-Fort Worth, Phoenix and Houston have the most attractive yields among the top 10, offering investors an opportunity to acquire assets and rest assured that rental demand will remain healthy. In the higher-priced metros among the top 10, including Washington, D.C., Boston, Los Angeles, Philadelphia and Riverside-San Bernardino, returns are not as attractive and investment capital can go further elsewhere.
San Francisco and San Jose are at the bottom of the list, mostly due to the already small buyer pool. Prices in these areas have already left most potential buyers on the sidelines regardless of interest rates. In San Jose, only 10 percent of households meet minimum qualifying income, and only 11 percent of San Francisco households reach the criteria. As a result, growth of the rental pool will need to occur though household formation rather than an increase in interest rates.
|Metro||Households No Longer Meeting Minimum Qualifying Income||Increase in Minimum Qualifying Income at 5.5% Interest|
|West Palm Beach||22,500||$8,100|
|Salt Lake City||19,300||$7,300|
Methodology: HomeUnion® Research Services calculated mortgage payments on a median-priced home in 40 major metros as of the end of 2017. Mortgage payments at 4.5 percent and 5.5 percent were compared with household income based on 17 different income tranches. For the purposes of this study, the number of households was deemed to be uniform through each tranche. Tax rates were based on the rate in each metro.
Sources: HomeUnion® Research Services, National Association of Realtors, U.S. Census Bureau