While there are high hopes for a general recovery in the US real estate market on the back of Donald Trump’s presidency, there are concerns about rising interest rates. Amid speculation that the Fed could increase US base rates up to 3 times during 2017, what would this do to first-time property buyers? Even though base rates are still near historic lows there are serious concerns about the bottom end of the US property market as and when base rates move further ahead.
Wage rises not keeping up
Wage rises are not keeping up with the gradual increase in mortgage rates and the gradual increase in US property prices. As a consequence the affordability factor will worsen significantly for first-time buyers in the next couple of years. This means that affordable housing will become less affordable and even those towards the middle price range of the US property market will start to feel the pinch. Indeed there are concerns that we could be on the verge of yet another US mortgage crisis brought on by competition at low interest rate levels and compounded by thin profit margins.
Affordability factor
It is worth mentioning that the US is not the only country which will see a major problem as and when base rates start to move back towards their “norm”. It is common knowledge that cheap finance has helped property market around the world and if, as suspected, some buyers are trading on the edge of their affordability factor, any future increases in base rates could push them over the edge. Even a gradual increase in base rates will ultimately gnaw away at the affordability factor and slowly investors will fall by the wayside and recent buyers will struggle.
No pain, no gain
If you take a step back and look at the situation from a distance, there is no way that the US, or indeed any other country, can move from the ultra-low base rates of today back to the norms of yesteryear without some pain. The authorities may try to lessen this pain with tax relief and perhaps buyer incentives but at some time those who pushed their finances to the limit will struggle. We will then need to go through the painful process of repossessions, falling prices and negative equity.
To those who have followed the US real estate market for some time, this seems to a certain extent like a rerun of 2008. However, we are unlikely to experience anywhere near the kind of problems which brought about the worldwide economic downturn. True, property prices will come under pressure, more people will renege on their mortgage and financial companies will struggle but hopefully the authorities will step in before things get too bad.
The lasting legacy of 2008
While the US mortgage crisis hit home in 2008 it can be traced back to 2007 and even some time before that. It was around this time it became apparent that sub-prime mortgage business was being done on minuscule margins and some of the customers signed up had no hope of ever paying back their full mortgage. The idea at the time was that buyers would take on their properties and resell for a profit in a relatively short space of time. However, once the sub-prime mortgage market began to collapse we saw the emergence of large holes in the financial sector.
As they say, the rest is history……………