When and if the Federal Reserve will raise interest rates — which would push mortgage rates higher — is still open for debate.
The Fed has two more chances to raise rates this year, in the October or December meeting of the Federal Open Market Commiteee.
Now, Selma Hepp, chief economist at Trulia, argues that it would take a really big increase for homebuyers to care that much.
When the Feds decide to raise rates, any increase will be nominal and gradual. The anticipation is that the initial increase will be only 25 basis points (e.g., from 3.75% to 4.00%). This is still about 50 basis points lower than the high reached in the summer of 2013 when the Federal Reserve first announced that it would start fading out of its easy monetary policy.
If rates increase 25 basis points, mortgage rates are still at historical lows and exceptionally favorable for homebuyers. The actual impact on a typical homebuyer will be marginal, but this really depends on the buyer’s budget. According to a new survey conducted online by Harris Poll on behalf of Trulia from September 14 -16, 2015, among 2,031 U.S. adults 18 and older, 69% of Americans who would ever buy a home said $250,000 or less is the maximum price that they would be willing to pay to buy their first or next home.
So for a buyer with household income of $60,000 and 20% down payment, the increase in mortgage rates on a 30-year fixed rate loan from 3.75% to 4%, would mean that the maximum amount they could spend on a home would fall from about $308,000 to $301,000 – keeping within the budget of most Americans. The drop is relatively larger for a buyer with household income of $100,000, but their budget is also relatively larger. Long story short, an increase in rates would not turn people off from buying a home, but it may slightly lower the price range in which they are looking to buy. Also, the impact is quite dependent on the price range in which the prospective buyer is looking to buy.
Interestingly, for Americans who are looking to purchase a home this year, mortgage rates are not the primary concern. Among Americans who would ever buy a home, most worried about being able to get a mortgage and if they could find a home that they would like. Raising mortgage rate is only the third concern, followed by fears that home prices would increase before they buy a home. But, for millennials aged 18-34 years old, simply being able to get a mortgage is the biggest and marginally larger concern than for all Americans in general. Millennials also worry more about finding a home they like and home prices rising before they worry about raising mortgage rates.
To read Hepp’s full blog, click here.