If you have been reading or listening to the news in the past thirty days, the big economic news is that the bond market has gone to hell and mortgage rates are on the rise. The mortgage change began in February but then just as quickly lost speed as March turned into April. But if you look at the market in the last two weeks rates shot up 10% from 3.4 to 3.8 percent. Most of us are not looking to buy a house this Spring so in one sense we don’t care, but if you are getting divorced and discussing the value of your home, there is an interesting collateral effect as the Federal Reserve signals that “cheap money” (they call it “quantitative easing”) comes to an end.
For the first time since 2007 buyers this Spring found that some houses were actually the subject of bidding wars while others sold at or near asking price. Our experience is that this has not occurred across the board but principally with desirable houses in desirable neighborhoods.
The reason for this is that buyers are nervous that as rates rise, they will no longer be able to afford the monthly cost of the higher mortgage and that they will “miss out” on the bargains of the past several years. Fair enough. The truth is that the huge bargains have been snapped up. And don’t be surprised that some of the folks who are buying today will be looking at their purchase a year or two from now with some sadness because demand for housing will weaken as the cost of buying rises.
But for each sale in this exuberant market there is a comp being posted on line that appraisers need to evaluate when deciding the value of a house undergoing valuation in divorce. In theory, they could probably discount that comparable somewhat because of the sudden rush to buy homes. They did the opposite in the down market when the only comparable might have been a house sold by a bank in foreclosure.
No appraisal can really dismiss a comparable sale because the market is “crazy” especially when it is not a distress sale but one in the open market populated with willing buyers and sellers. However, the fact that a neighborhood has a few sales at these new better prices does not portend a sustainable upswing. People who are rushing to get what is left of 4% mortgage money better realize that they may stay in their home for several years to get the price they paid this Spring. And people going through divorce who would prefer to stay rather than move may well find that they “bought out” their spouse at a premium.
On a $100,000 loan amortized over thirty years the difference between 3.4% and 3.8 is only $23 a month or a little over $8,200 through the life of the loan. Remember as well that this interest is typically a deduction from income for federal tax purposes. That small amount is, of course, multiplied as the mortgage amount increases so that the $500,000 borrower is staring at a $40,000 difference.