Now that the Federal Reserve has pushed up interest rates for just the second time in a decade, what does it mean for mortgage rates and the housing market?
It depends on who’s reading the tea leaves.
Some Bay Area brokers anticipate the rate hike will spur prospective homebuyers to lock in historically low mortgage rates ahead of more Fed boosts in 2017 — even though mortgages aren’t directly linked to the Fed’s benchmark rate. But rising rates could make owners with already low rates wary of selling.
Real estate agents and brokers are hoping the Fed’s rate hike this week will be a catalyst for buyers’ fear of missing out, soon driving them into the market.
“It’s going to stimulate the market” in the coming months, said William Doerlich, president-elect of the Bay East Association of Realtors. “Buyers who’ve been sitting on the fence, going, `Is it time? Is it time?’ — this is going to be the little kick in the butt that says, `Hey rates are starting to go up. We better get ahead of the curve, we better get out there or we’re going to lose some of our buying power.’”
But one economist said it’s impossible to predict the psychology of buyers and sellers in this new environment: “It could be that people who are locked in to low mortgage rates are going to be reluctant to sell,” said Alexander Field, professor of economics at Santa Clara University’s Leavey School of Business. “Because they’ll lose the benefits of those low rates” when it’s time to go looking for a new house.”
It can be notoriously tough to forecast trends in mortgage rates with precision, but the smart-money investors may have already placed their bets.
Field pointed out that the mortgage market already had responded to the Fed’s anticipated adjustment of the nation’s benchmark rate before it happened. Astute buyers, he said, would have been off the fence prior to Wednesday’s announcement, which raised the nation’s benchmark interest rate by a quarter of a percentage point. “It would have been smart in retrospect to buy that house in October.”
Especially in the Bay Area, where the median price of a single-family home is often painful: $499,000 in Contra Costa County; $702,500 in Alameda County; $940,000 in Santa Clara County; and $1.268 million in San Mateo County, according to a report last month by the CoreLogic real estate information service.
After bottoming out at 3.47 percent in late October, the average rate on 30-year fixed-rate mortgage loans ticked up to 4.13 percent last week. That could prove to be the motivation for potential buyers that Doerlich anticipates.
But the increase is still a relatively modest one. Even amid speculation about what the incoming Trump Administration’s economic policies might be, mortgage rates have simply returned to approximately where they were before the Fed’s previous increase in 2015. (That was its first increase since 2006.)
Reading this on your iPhone or iPad? Check out our new Apple News app channel here, and if you like it click the + at the top of the page.
Mortgage rates don’t necessarily rise and fall with the Fed. In fact, they are more closely tied to the rates on long-range bonds, including 10-year Treasury bonds, which are widely regarded as safe investments when international markets rumble. After the Fed raised its marker in 2015, mortgage rates rose a bit, but then fell – and fell some more, post-Brexit, as shaken investors stowed their money in Treasury bonds.
The Fed, which is expected to raise the benchmark rate two or three more times in 2017, is trying to “preemptively nip the possibility of a resurgence of inflation — nip it in the bud,” Field said.
This leaves mortgage lenders in an unenviable spot: “If they don’t correctly forecast the inflation rate and the inflation rate turns out to be higher, then the lenders lose and the borrowers win,” he said.
Should lenders continue to raise mortgage rates, then homebuyers, of course, will be faced with bigger monthly payments, as will owners who hold adjustable loans.
That could dampen the demand for homes — though Field said demand could remain steady, “if the economy remains reasonably strong and the unemployment rate remains low and people are reasonably sure of their jobs. And then if Trump starts big deficit spending with infrastructure projects and tax cuts to stimulate the economy — that could counteract the negative effect of rising mortgage rates on the demand for housing.”
Chris Trapani, founder and CEO of the Sereno Group residential real estate sales firm, said he believes the housing market will be sparked in the short term by the Fed’s move and the recent mortgage rate increases.
After living for years with low interest rates, he said, “people just kind of came to expect that rates would be at 3 or 4 percent forever, and I think that kind of lulled some buyers to sleep, in a way. Because they didn’t feel any urgency to get a loan. Now they’re thinking, `Well, wait a minute, I’d better get out there and lock it in.’”
