By Chad Taylor
Well, today’s historically low interest rates are going, going, almost gone. Post election, interest rates had already jumped up a bit. Add to that Wednesday’s announcement from the Fed that they were raising their benchmark (federal funds) rate for only the second time in a decade and the combination equals higher interest rates for a borrower. The last time the fed increased the federal funds rate was December of last year.
Interest rates rising is not all bad, right? If you have money in a savings account you may actually be able to make a little money on it now. Also, the Fed has justified their recent move to raise the benchmark rate by acknowledging the strength of the overall US economy. Unemployment is at 4.6 percent as of the end of November which is the lowest unemployment that we have seen since 2007. Although we are not seeing the 2 percent inflation target that the Fed has set yet, indications are that the economy is headed in that direction. So overall this is good news for America.
The biggest news from Wednesday’s announcement was the change in the Fed’s plan to raise rates three times in 2017 versus the previous plan of only two rate increases. This may cause rates to increase at a slightly higher rate than was first anticipated by the markets.
So how will the higher rates affect you? That depends. Are you thinking of selling a home, or buying a home, or both?
Let’s start with selling.
Higher rates=lower home values. Please know that I have over-simplified this statement for dramatic purposes, however, there is a lot of truth to this statement as well. As the cost of borrowing money goes up, historically, values can adjust down to offset the additional cost to the buyer. Just how strongly values respond to higher interest rates is also dependent upon supply and demand at the time. If you have been following my recent columns, you then know inventory has been on the rise since the summer months. Therefore, I will be watching median sales prices very closely to see how they react in the coming days to higher interest rates
Higher rates=smaller buyer pool. Not only do higher interest rates reduce a potential home buyer’s budget, but in some cases the higher costs of borrowing can take someone out of the market altogether. It is all about dollars and cents. As rates continue to rise, some buyers will be forced out of the market to purchase a home. This trend tends to start at the first-time home buyer price range and then has a domino effect moving up from starter home, to second home, and so on. If starter homes have a challenge selling, then those sellers cannot by the move up home. Then that move-up homeowner cannot purchase their next home. Well, you get the picture.
Now to the buyers out there.
Higher rates=less home for the same price. That’s right. The rule of thumb is that for every 1 percent that your mortgage interest rate increases, you must purchase a home for 10 percent less in price to keep the same monthly mortgage payment. So if you are currently looking at $350,000 homes with an interest rate of 4 percent to stay within your budget and rates go up to 5 percent, you would then need to look at no more than a $315,000 home to keep your payment around the same amount. That $35,000 drop in purchase price can make a big difference in the quality, size, or location of the home that you would like to purchase.
Higher rates=less affordability. Housing affordability has been at an all-time high for years now due to historically low interest rates. To put that number in perspective, historically it has taken 21.6 percent of an American family’s household income to pay their home mortgage each month. In 2014, that number was 15.2 percent and then it dropped slightly to 15 percent in 2015. Essentially, low interest rates have given the American family an additional 6 percent of their household income to invest elsewhere. As rates go up, that luxury will slowly slip away.
Overall, the Fed’s move this week is an endorsement of the American economy. And rising rates are a natural part of our economic cycle. I spoke the the Post’s own Mike Miles with Fountain Mortgage this week and he felt that the market will settle down a bit in the coming weeks. However, he did say that the days of a 30 year mortgage at less than a 4 percent interest rate are a thing of the past. At lease for the foreseeable future.
If you have real estate plans for the new year, call or email us today to discuss how there recent changes in the market may affect your timeline. If a purchase is on the horizon for 2017, I would certainly recommend that you reach out to a trusted lender, such as Mike Miles from Fountain Mortgage, sooner rather than later.
This weekly sponsored column is written by Chad Taylor of the Taylor-Made Team and Keller Williams Realty Key Partners, LLC. The Taylor-Made Team consistently performs in the top 3 percent of Realtors in the Heartland MLS. Please submit follow-up questions in the comments section or via email. You can find out more about the Taylor-Made Team on its website. And always feel free to call at 913-825-7540.