For the next 24 or so hours everyone will be palavering about what’s going on behind the curtains at the Central Bank and what it means for housing.
While a lot of analysts are expecting that tomorrow the Federal Reserve will announce the first real rate hike in seven years, not everyone is so certain.
As the industry stands by with bated breath for the Federal Reserve's two-day September meeting to conclude, experts are weighing in their forecast.
In a client note, Deutsche Bank (DB) says they expect no action.
“We think the most likely outcome for the Fed is a “hawkish hold,” their analysts say. “This should keep flattening pressure on the curve and risk markets prone to risk off.”
Likewise, Rick Sharga, executive vice president of Auction.com, says he gives it a slim chance at most.
"It seems highly unlikely that the Fed will raise interest rates at its September meeting, given the extreme stock market volatility we’ve seen over the past few weeks, concerns about the Chinese and European economies, and less-than-exciting recent employment and wage numbers,” Sharga says. “But even if the Fed does raise rates, it might not spell doom and gloom for the housing market.
The Fed raising rates may not cause mortgage rates to go up at all.
The market may not be strong enough to support its current rate of sales at higher interest rates, especially since affordability is becoming a problem in some of the higher-priced markets, due to the fact that home price appreciation has far outpaced wage growth over the past six years, Sharga says.
“While lenders may temporarily raise rates, they’ll probably lower them again in a repeat performance of what we saw when the Fed announced it was ending the QE program: rates jumped up by almost a point; applications cratered; home sales slowed down; rates returned to lower levels; home sales and loan applications picked back up. Most likely we’ll see slow, incremental rate increases over time as lenders test the waters,” he says.
Sharga also said that rate increases could actually be good for housing. One of the biggest headwinds in the housing market today is tight credit.
“There’s virtually no non-agency lending…nothing outside of QM, other than jumbo loans to rich borrowers the banks want to grab as customers for other services,” Sharga says. “Higher interest rates would actually allow for loans to be priced in a way that accommodated some degree of risk – that would stimulate non-agency loans from non-bank lenders, and may even entice private capital back into the market. Higher rates would also slow down home price appreciation (at some point), which would also be healthy for the market."
Jonathan Smoke, chief economist for realtor.com, is not so sure about that.
“The potential 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 says.
Forecasts for mortgage rates vary, but indicate a potential increase of 50 basis points over the next 12 months. Smoke’s analysis of loan-level data from Optimal Blue, an enterprise lending services platform, for the first half of this year demonstrates how a 50 basis point rate increase could impact potential buyers.
Smoke says that a 50 basis point increase in the effective mortgage rate could result in the following outcomes:
- A 6% increase in monthly payments on new mortgages. In May, the average loan with a 30-year fixed mortgage was $231,000, which had a monthly principal and interest payment of $1,107 at the average interest rate of 4.03%. When rates reach 4.53%, that same loan amount would result in a monthly payment of $1,175, an increase of 6%.
- As much as 7% rejection of mortgage applications. The increase in the monthly debt burden as a result of higher rates will stress the upper limits of loan- and debt-to-income ratios for new loan applicants. “Based on analysis of loan-level ratios for a large sample of loans approved in the first half of this year, as much as 7% of mortgage applicants would have failed to get approval as a result of higher debt-to-income ratios caused by higher rates,” said Smoke.
- Average debt-to-income ratio to increase by 4%. The average debt-to-income ratio for mortgages in the first half of 2015 was 35.5%. With an increase of mortgage rates by 50 basis points and keeping all other factors equal, the average debt-to-income ratio increases by 4% to 37.0%.
- Popularity of loan types will likely shift with rate increases. In the first half of this year, conventional mortgages were most popular, capturing 50% of the market, followed by 31% FHA, and 12% VA. Under the modeled higher rate scenario, conventional and jumbo mortgages were most likely to hit an upper limit on debt-to-income ratios, and VA and FHA loans were least likely to hit an upper limit.
Nela Richardson, chief economist at Redfin, says that she thinks the effect on demand won’t be so much on volume as on housing type.
Richardson expects that if and when there is a rate hike, the most common response from buyers will be to lower their price range. So she doesn’t expect to see a big impact on demand, but that demand will be slightly redirected toward lower priced homes.
“”In a buyer survey we conducted in late July, we found that while most buyers believed rates would rise soon, and that today’s low rates are a key driver motivating people in the market to buy now, they aren’t that concerned about the impending rate hike. What they’re concerned about is affordability and rising home prices,” Richardson said. “Our latest Housing Demand Index shows that buyers have already started to reach their limit on prices, so a price correction would be welcome news to buyers.”