Citing information indicating “the labor market has continued to strengthen and that economic activity has been rising at a solid rate,” the Federal Open Market Committee of the Federal Reserve opted to increase the federal funds rate by 25 basis points to 2% this week. Most analysts expected the Fed to raise rates in June after voting against the move in May. In a public statement, the committee cited these reasons for feeling the American economy could handle the rising rates:
- Strong job gains
- Declining unemployment
- Increased household spending
- Strong growth in business fixed investment
What do Rising Interest Rates Mean for Real Estate?
The Fed’s positive indicators tend to be positive for real estate as well, but interest rate hikes can negatively affect certain sectors of the market. The most noticeable effect is usually that mortgage rates rise, which can affect borrowers with short-term mortgages with variable rates in particular.
Sam Khater, chief economist for Freddie Mac, predicted that this increase will not have a dramatic effect on existing borrowers because there are far fewer short-term mortgages in existence today than there were before the last housing downturn. He said, “One thing to point out is there are fewer consumers today whose debt is tied to short-term rates…. This means the recent short-term rate hikes will be less impactful than what was seen in the mid-2000s.”
One type of loan that will feel an impact immediately, however, will be home equity lines of credit (HELOCs). Interest rates on HELOCs and, of interest to real estate investors, credit cards, will rise within one or two billing cycles. Usually HELOC interest rates are adjustable, so homeowners with these types of debt could end up paying more on the interest side of their debts.
For home buyers, higher interest rates may discourage potential buyers from starting the search process. However, the cold, hard numbers indicate buying a home even at these slightly higher interest rates is still a good deal. In fact, according to Trulia Trends, it would not stop making sense for most buyers in most market to opt for buying instead of renting until interest rates reach 10.5%. That is far, far in the future and unlikely to occur anyway, albeit not entirely unprecedented. At present, buyers may have to look for slightly less expensive houses than they were considering presently, which could exacerbate affordability issues in popular housing markets.
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