Yesterday the Federal Reserve raised the rates on the interest they charge the banks, which will in turn lead to an increase in what the banks charge you for interest. The interest was raised a quarter percent so essentially the banks are looking at borrowing money between 1.000% and 1.250% up from 0.750% to 1.000%, a pretty sharp increase when you compare that the jump from 0.750% to 1.000% is pretty dramatic. In turn the banks will have the charge their customers more so they can keep earning money. When you consider the bank is paying 0.75% and charging you 3.810% - what does that quarter point increase really mean in the long run?
Last week, we saw rates at their lowest since the beginning of the year and this morning we didn't see a massive freakout on the banks' part but they could still be figuring out how to adjust their numbers to avoid losing business. However, the Feds are promising another rate increase this year and based on yesterday, it seems like a promise they will likely keep. They're trying to hedge inflation which is word no one likes to hear but the government more so than most. A general unease in the direction our country is going may also have something to do with buyers sitting on the fence even though rates are low and inventory is out there.
Reports are showing that as a whole, our country is back to a normal housing market. We know our area far surpassed it's pre-crash heights long ago but most of the country was still waiting to recover, not having the strong employment base we benefit from here. Who thought the talk of 2017 would be opening coal mines to spur job creation? We do benefit from record low unemployment as a nation, all the careful strategies put into place since 2008 seem to have worked, but there are still many people not currently on unemployment who have not returned to the job force. Of course these are all very important to consider when looking at the health of real estate in the US because you can't buy a home without a job. One might look at all the positive home sales reports across the nation and assume the general public can handle a higher interest rate but that's not a fair assumption.
Right now sellers, especially here, have exceptionally high expectations and a rate hike could edge out any buyers who were at the top of their borrowing capacity. Higher rates equal higher monthly payments which lower your borrowing amount. A small rate hike could be the difference between a family being able to afford a home in a good neighborhood and a condo in the same neighborhood. With banks continuing to be conservative on the debt to income ratio, you almost wonder if something is going to give to keep the market moving forward. If buyers can't afford the homes at the prices sellers want, we're going to stall. A stall may be fine here but it might be massive for the guy in Ohio who's home is just now worth what he needs to get to move his family from a 2 bedroom home to a 3 bedroom home.
So now we wonder, are we going to start seeing sub-prime loans again? Will banks be offering options to borrow a percentage of the downpayment to avoid PMI? Those junior loans bridging the gap between the 80% primary loan and what the buyer can afford for a downpayment lost the banks the most money during the crash when homes foreclosed or sold as a shortsale and the primary lenders got paid first.
Now our clients who are happy in their homes may be wondering, "How does this affect me?" Well, if you were thinking about moving into a larger home with your amazing equity, it will likely cost you more than you were expecting if you're locking in at a higher interest rate. When buyers get squeezed on interest rates, that means the buyer pool for your home will be smaller. Buyers could decide the fight for rent control is a better bet and become permanent tenants, effectively taking more would-be buyers out of the buying pool. There will likely be less inventory because more would-be sellers won't be able to move up; low inventory is usually not a bad thing for sellers but low buyer turnout or uneasy buyers does not make low inventory a positive for sellers. It just creates a sad market where buyers sit on the fence waiting for their perfect home or ask for expensive contingencies switching our market from a seller's market to a buyer's market. The relationship between buyer and seller is complex, and the mentality of one has a great effect on the other.
It will be interesting to see where this all heads. If you've been thinking of refinancing, now is a good time to get that ball rolling before another increase. If you have been considering making a move - selling and moving up or buying an investment, we'd be happy to consult with you about your options. We are happy to share the contact information of our trusted lenders if you want some advice on where to go from here.