How will higher interest rates affect housing?

WASHINGTON – Dec. 11, 2015 – The timer is ticking: The Federal Open Market Committee is less than a week away from a vote to raise the federal funds rate for the first time since June 2006, according to most analysts’ predictions. An uptick in the federal funds rate would then prompt interest rates to move higher.
Some housing analysts say just anticipation of a rate hike has already affected the housing market.

“The housing market’s capacity for existing-home sales is declining with the expectation of a Fed rate increase, pre-adjusting mortgage rates and a slowdown in house price appreciation,” says Mark Fleming, chief economist at First American Financial, in a new report on the fourth quarter Real Estate Sentiment Index. “Market capacity remains modestly in excess of actual sales due to leverage-assisted housing asset inflation, which is home price appreciation fueled by low mortgage rates. Rising mortgage interest rates and moderation in house price appreciation were the most important market fundamentals that reduced market capacity this month. Now that interest rates are pre-adjusting in response to signals from the Fed for a highly expected increase in December, demand is also declining.”

A 25-basis point rise in the 30-year fixed-rate mortgage, for example (which was at 3.95 percent this week), would likely slow home appreciation by 1 percent more than expected without the rate increase, Fleming says. He also predicts that existing-home sales would then slow by about 2.5 percent on annualized and seasonally adjusted basis – a decline of less than 150,000 sales a year.

“The housing market isn’t doomed by a Fed rate increase, but demand would fall modestly,” Fleming maintains.

Just how big of an impact could it have to potential home shoppers’ wallets? Forbes.com cites an example based on a 30-year fixed-rate mortgage, 10 percent downpayment, $350,000 home and 4 percent interest rate. Under that example, it would cost home purchasers about $1,503.86 per month plus taxes, homeowner’s insurance and Private Mortgage Insurance. That same 30-year fixed-rate mortgage with a 4.5 percent interest rate would cost a homebuyer $1,596.06 per month – an extra $92.20 per month, or $33,191.54 over the 30-year life of a mortgage. If rates rise to 5 percent, the costs would jump to an extra $184.40 per month and $66,383 over the 30-year life of the loan.

Despite the uptick in rates, “expectations for future homeownership demand remain positive, despite changing market conditions,” Fleming notes.

According to the First American report, interest rates would need to reach 5.1 percent before significantly influencing the volume of residential transactions.

Source: “What Will the Looming Fed Rate Hike Do to Housing?” HousingWire (Dec. 9, 2015) and “How Much House Will a Rate Hike Cost You?” Forbes (Nov. 8, 2015)
© Copyright 2015 INFORMATION, INC. Bethesda, MD (301) 215-4688

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