In a housing market that is already flooded with homes the last thing we need is an increase in interest rates. Over the last few weeks, we have seen a steady rise from an average of 6% to 6.5%. While a small increase will have minimal effect, each .25% increase does make a loan more expensive and lowers the amount of money a Buyer may have been able to loan.
The increase is due mostly to investors flooding to purchase bonds as a safe haven from the volatile stock market and falling dollar. As long term bond prices increase, long term mortgage rates follow as the rates are tied to the bond market. Interest rates are also tied to the availability of money. Typically during the summer months, the money supply is lower due to the increase in home sales. However, the shortage in the money supply is also attributed to the current lending crisis as banks have tightened their lending practices and may be reluctant to increase their lending exposure.
For buyers who are sitting on the fence waiting for home prices to decrease, they now have to evaluate the cost of the loan associated with the price of the house. By waiting for a house to drop $10,000 in price may cost them much more in the long run if a rate increases by just .25%. Throughout the life of a loan that .25% could cost tens of thousands of dollars.