What does a Fed rate hike mean for housing and for you?
Key housing economists weigh in on the Big Question
The Federal Open Market Committee meets Wednesday morning and the big question is: will they raise interest rates?
The housing market rode historically low interest rates for years now, and this marks the first time in recent memory most analysts think they will take action on rates, bumping them 0.25%.
Most American economists are about 80% certain a rate hike is coming. Even European analysts expect a hike. In a recent Société Générale US Credit comment, analysts tell its equities investors the Fed will move ahead – most likely Wednesday, but by October or December for certain.
"Although admittedly a close call, our economists still expect Fed lift-off to be announced this week, but they also envision the Fed to have ‘dovish packaging’ that provides indications of no further hikes in 2015 and a gradual pace of tightening,” they say in a client note. “If instead a no-hike scenario were to play out, our economists expect that the accompanying statement would not be dovish, but instead leave prospects for a 2015 hike on the table – in October or December.
But then the central bank has on many occasions conjured up rationales for keeping rates where they are, so it’s not certain. (Vote in HousingWire’s poll here; results published tomorrow, so check back.)
Assuming the Fed does raise interest rates, how will that affect housing?
“If the Feds decide to increase the rate at their meeting tomorrow, any increases in rates will be nominal and gradual. Impact on home-buyers will be minimal,” says Selma Hepp, chief economist for Trulia. “For example, an increase of 25 basis points on a mortgage loan of $250,000, raises the mortgage payment by $35. I don’t think that will turn people off from buying a home, but they may end up looking to buy a slightly less expensive home.”
Hepp says however, the markets’ recent impulsiveness may still result in an initial knee-jerk reaction to any changes in Fed’s policy causing some jump in rates.
“The rates should quickly reverse back to current levels as expectations adjust. In fact, economic uncertainty abroad will help keep the mortgage rates low for extended time,” Hepp says. “The greater concern is what all of this is going to do to consumer confidence. Consumers are sensitive to topline news stories and may prefer to ride out the volatility for a little while.”
Hepp says she thinks the strong economic fundamentals, including robust job growth, better-paying jobs, rising wages and strong consumer demand will, in fact, increase demand for homes.
“Long term, interest rates may slow home price appreciation but I don’t think it will have a notable impact on home sales,” Hepp says.
Mark Fleming, chief economist at First American Financial (FAF) argues that a Fed rate increase would not doom the housing market. Instead, the housing market will modestly adjust to a Fed rate increase.
“Of course, we cannot be sure exactly how mortgage rates and the housing market will respond to a Fed rate increase. But, we can say with some certainty that the Fed will eventually raise rates,” Fleming said. “When it does, the housing market isn’t doomed to fail, but rather adjust to the reality of interest rates that are reflective of a strengthening economy and certainly more traditional financial conditions.”
Fleming says he has faith the housing market will modestly adjust to a Fed rate increase.
“Yet, I have argued here, as others have, that rising rates don’t necessarily cause a negative demand shock and falling home prices. When the Fed raises interest rates, it’s because the Fed believes that the economy is strong enough to adjust and has the potential to begin overheating (that’s what inflation measures),” he says. “A stronger economy, more or better jobs, rising wages, increased confidence—these factors all increase demand for housing. In other words, rising rates are indicative of increased home sales and upward pressure on prices.”
Jonathan Smoke, chief economist for realtor.com, says he sees more sound and fury than real impact.
“The Fed decision is symbol over substance as far as immediate direct impact to mortgage rates go. Their move will impact the consumer and the broader perception and expectations for rates given how much attention is paid to the Fed and this particular decision,” Smoke says. “As a result, I think the move away from zero interest rate policy (for short-term rates) is a harbinger of higher mortgage rates ahead and the beginning of the end of this seven-year era of incredibly low mortgage rates and corresponding high affordability.”
Smoke goes a step farther than most surveyed, saying he thinks a rate hike may actually be good for housing.
“In aggregate I think the near-term impact is negligible if not positive. The number two reason active home shoppers cited why they were in the market for a home this summer was ‘favorable interest rates,’” Smoke says.
He explained that “Favorable interest rates” was cited by 27% of home shoppers in the BDX Home Shopper Insights Panel, Summer 2015 as the reason why they were looking to buy a home. The highest trigger was “Tired of current home” (28%), and number three was “Favorable home prices” (26%).
“The 30-year rate already varied by 50 basis points from its low in January to its high in June, and since then we’ve floated back down 20 basis points,” Smoke says. “No one is expecting rates to move substantially in the months ahead given global economic weakness. We’re likely to see about 50 basis points of increase over the next 12 months. The historical perspective shows that even at 50 basis points higher than today, mortgage rates are incredibly low. Couple that with improving household finances and incomes—especially in the segments who are driving home sales this year—slightly higher rates won’t put a damper on the increased demand we’ve seen this year.”
Smoke says he believes a rate hike may be the catalyst to get some people who have been waiting for varying reasons to go ahead and take the plunge on a purchase.
“(G)iven how much attention is paid to the Fed’s move, this could very well influence consumers who have been waiting to realize that it only gets less affordable and more challenging from here,” Smoke says.
Smoke warns there are risks from the higher rates as higher rates do cause higher monthly payments. For instance, he notes, the higher debt burdens from higher rates will put a percentage of the market at risk for not being able to qualify for a mortgage.
“As a result, we expect some segments to be more challenged than others and certain markets to see more would-be buyers with more qualifying challenges. Some of that risk will be mitigated by shifts in loan type and more usage of hybrid rate terms,” Smoke says. “We’re months if not years away from the type of high rates that would pose substantial risk to home sales, especially since what’s driving the gradual movement to higher rates is a much healthier economy producing consistent solid gains in employment and household formations.”
Zillow Chief Economist Svenja Gudell tells HousingWire that she thinks any impact from a rate increase will be limited to key markets where housing is already expensive and affordability is already an issue.
“I don’t think it’s going to have a big impact,” Gudell says. “It will have a small impact in markets like San Francisco where housing is expensive. It will hit markets where there is very little wiggle room, more than a market like Cleveland or a metro area where home values aren’t so high.
“It’s not going to be a show stopper,” she says. “The Fed is not interested in rocking the system; it will be a fairly smooth ramp up.
Will news or rising rates bring potential buyers off the sidelines?
“I don’t think so. We’ve seen really low rates for a long time, rates at historical lows – don’t think people have been waiting to see if rates go up,” Gudell says.