by Guest writer Bob Cahill, Sr. Mortgage Banker, Leader Bank NA
With the first Fed rate increase since 2006 expected in mid-December, 30 year fixed mortgage rates have already risen by roughly .25% – to 3.875-4.00% – in anticipation of such an increase. At this time, only a horrific jobs report in early December will derail a .25% increase in the Federal Funds Target Rate from .25% to .50%. This increase should push up financing costs across the board, including home equity lines of credit (HELOC) and mortgage rates. The impact will limit what we all can pay for housing and other discretionary items.
Many believe that we’re looking at 30 year fixed rates to be in the 4.25% to 4.75% range by the end of 2016. If mortgage rates jump an anticipated worst case 1%, a typical housing payment will be about 10% higher assuming home prices stay the same. This increased cost will most likely not affect demand much at the upper-middle and upper classes, because those buyers will most likely find a way to purchase if the time is right and they can find a home that meets their goals. However, this may adversely impact first time buyers that may not have the additional monthly cash flow to support a higher payment.
|$500k purchase with 20% down|
The roughly 10% increased cost assessment for a 1% rate increase assumes that prices will not be affected by higher interest rates, and this is as big a question as the interest rate unknowns. Some believe there’s still enough demand relative to supply that prices can continue to climb with higher rates, but if economic activity slows, the impact on prices can of course cool home appreciation and possibly even soften prices. It’s my expectation that with years of extremely low rates and stimulus that’s unprecedented, we will continue to see small appreciation in prices even in a slightly higher interest rate market.
So the question really is, how do buyers and sellers manage what they can control? My perspective is that the only thing we can control is how we react… For buyers with two unknowns, namely interest rates and prices, the focus needs to be on understanding what your budget can afford, and then finding the right property within that budget.
The budget task is pretty straight forward but does require time to objectively and subjectively think about your future. Finding the right property might still be the bigger challenge with the current market still favoring sellers. One positive of higher rates for buyers might be a slight reduction in demand which might help ease the multiple bid competition that we’ve been seeing, and allow you to land the home you’ve been seeking. Another potential positive for buyers might be reduced prices, but this will most likely take some time for the affordability factors to pan out. Sellers on the other hand will have the same budget and financial planning effort, but the added task of determining their future purchase plans.
In summary, I believe the housing market will continue to appreciate, but at a more modest pace and a closer balance between a seller and buyer’s market will be achieved. I also suggest leveraging the financial, tax and mortgage planning, and real estate resources available to you so you can better plan your next sale and/or purchase. Remember, rates back in 2013 crept up by almost 1% to ~4.50% and although demand softened, most buyers that purchased with a higher rate have since realized lower refinance costs and rates, and higher current values. This is why I believe the fundamental driving reason behind buying or selling is more dependent on what’s right for your personal situation and financial budget.
Bob Cahill,Sr. Mortgage Banker, Leader Bank N.A.
781-589-8756, 877-509-6614 (secure efax)
(NMLS # 449250) (NMLS LO# 485042)