After years of speculation about mortgage interest rates, the Federal Reserve has begun increasing the Fed Funds Rate. The Fed Funds rate sets the cost of borrowing for the banks, and consequently the cost of mortgages for homebuyers.
With additional moves at hand, there is concern that more expensive mortgage rates could hamper the housing recovery. Borrowers who now qualify for a $200,000 mortgage at 4.25% would see their borrowing power plunge more than 10% to $177,600 if mortgage interest rates rise by a full percentage point to 5.25%.
While a full percentage point increase won’t occur all at once, the Fed has indicated that it intends to raise rates another two to three times this year. While such a move isn’t likely to discourage most buyers from purchasing a home, buyers are likely to scale back on their purchase due to concerns about the monthly payment.
Potential homebuyers have been watching home prices increase substantially over the past 12-24 months, however, many haven’t felt a strong sense of urgency due to the fact mortgage interest rates have held steady in their current range. Talk of mortgage rate increases had been circulating for months and thus this talk about rising rates was largely falling on deaf ears.
That said, once these rate hikes are now being implemented – a move which signals the government is serious about adjusting monetary policy and this will force buyers into the market and likely drive prices up even further. This prediction is one based on historical data and this trend would mimic the activity seen in 2005 when mortgage interest rate hikes correlated with rising sale prices. While many consumers assume that when rates go up, prices go down, the trend was exactly the opposite during previous rising rate environments. Rate hikes tend to reflect what is going on in the economy, and if the economy is improving, ie. a healthy labor market (low unemployment rates, rising incomes), the cost of gas and other items are down which increases consumer spending, stronger home sales with rising home values and increased construction, all of this increases consumer confidence and bodes well for the economy as well as the housing market.
If someone is buying up, they should consider the math… for instance if prices are expected to increase 10% over the course of the year and you’re a homeowner looking at buying up – selling a $300,000 house and buying a $500,000 house – you shouldn’t wait a year in the hopes of selling your current home for $330,000 as the house you wish to purchase would increase to $550,000 during this period and thus such a delay would carry a cost of $20,000.
However, if you are downsizing using the formula above, you would gain $20,000. While this model is simplistic consumers just need to know what they are doing and plan accordingly.
Mortgage rate increases are most likely to impact younger millennial and first-time buyers and thus starter homes, as well as the desired location, price range, and size of home these buyers pursue.
Other generations aren’t likely to feel the impact as significantly. Why? Millennials carry debt and have down payments that are on the small side. The most common debt is on credit cards (had by 78% of millennials), followed by a car loan (68%), a personal loan (62%), a mortgage (62%), a student loan (61%), and a home equity loan (57%). When comparing debt by generation, just 49% of Gen Xers and 9% of baby boomers have college debt—a burden thought by many to be closing millennials off from purchasing.
Additionally, when it comes to a down payment, millennials have less than others. The majority (37%) have less than 10% saved, versus 34% of Gen Xers and 20% of baby boomers.
Existing debt and lower down payments leave younger shoppers more exposed than others to the impact of rising mortgage rates and record-high home prices. While these obstacles won’t prevent millennials from finding and buying a home, but most will have to adapt to these challenging market conditions by adjusting their home search.
Whenever the financial landscape is in flux and changing, it’s even more important that homebuyers and sellers consult with a Realtor before making the decision to buy or sell a home.
If you, or someone you know is considering Buying or Selling a Home in Columbus, Ohio please contact The Opland Group. We offer professional real estate advice and look forward to helping you achieve your real estate goals!
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