An Interest Rate Hike and the Power of 53 Bucks

interest_rates_shutterstock_WEBThis summer, real estate agents have been encouraging Southern Nevada homebuyers to jump into the market, dangling historically low—but soon to rise—mortgage rates as the carrot. The consensus among real estate experts is that 30-year interest rates, which have been hovering between 4 and 4.5 percent for the past year, will likely climb to 5 percent this fall.

But one insider says it’s highly unlikely such a rate hike would have any tangible impact on potential buyers. Assume someone buys a resale home at the Greater Las Vegas Association of Realtors’ current median price of $220,000, puts down 20 percent and has a loan amount of $176,000. A 30-year mortgage at 4.5 percent would yield a principal/interest payment of $891.77. At 5 percent, that payment jumps to $944.81.

That $53.04 monthly difference wouldn’t be enough to send buyers fleeing from the market, says Ed Coulson, head of UNLV’s Lied Institute for Real Estate Studies. “I think these impacts are pretty modest,” he says. “Most people are really just looking at that monthly payment, and that increase isn’t enough of a factor.”

What about a full percentage point jump to 5.5 percent? Coulson says that might keep some nervous buyers on the sidelines. Then again, history shows the U.S. real estate market has survived far greater interest-rate hikes.

Freddie Mac’s historical average (spanning a little more than 40 years) is about 8 percent, and even prior to the Great Recession, rates hovered around 6 percent. And think back to the early 1980s during Reaganomics, when mortgage rates ranged from 13 to 16 percent. Even with those maddening price increases, people still bought into the American Dream.

Then again, if you did purchase that $220,000 resale home today, deposited the $53 you saved every month into an investment account earning 5 percent annually, in 30 years, you’d have a little more than $44,000. What that will buy you in 2045 is anyone’s guess, but it sure makes those real estate agents look smart today.