Last Wednesday The Federal Reserve increased interest rates by a quarter of a percent. This is a big move as interest rates have not been increased in seven years, before the housing market crash. Although rates were increased by only 0.25 percent, home buyers across the nation are concerned. Understandably so, mortgage rates have been at an all time historical low, so what does this mean for buyers? Can the housing market withstand the increase?
The economy has seen growth in the last few years thanks to low interest rates, steady job gains, and improving household finances. The first half of 2015 was strong, it was a matter of time before The Fed increased interest rates. The Fed has stressed that they are planning to increase rates gradually and in small increments. Over the next year, they plan to increase rates by 1 percent, which will boost the economy by 0.15 percentage points and 30,000 monthly job gains.
As for the housing market, the last few years we have seen a recovery and 2015 being the best year so far. The recovery has been partly due to low mortgage rates, but mainly from job security and economic growth. 30-year mortgages are priced off 10-year Treasury note yields, which do rise as short-term rates climb, but not as steeply. Economist don’t believe the quarter of a percent hike will immediately impact mortgages. The market has been anticipating the hike for months and have priced with the move.
Economist also believe the hike won’t have much of an impact on the housing market over the next year. If rates do go up one percent, mortgage rates can be expected to rise to 4.1 percent from 3.9. A $225,000 mortgage monthly payment would raise $26 to $1,454, this is not enough to deter buyers. Adjustable-rate mortgages, which are usually modified annually, could see an increase about twice as rapidly, by about a half a percent. But, economists are saying if steady jobs and incomes increase, the rate impacts should be modest.
Although we have not seen an increase in interest rates in nearly 10 years, buyers should not be concerned. The impact this will have on the housing market will be modest and with a strong economy, the housing market will strive this coming year.
