Fed PolicyMortgage

What will the looming Fed rate hike do to housing?

Impact expected to be felt by first-time homebuyers

It’s now less than a week until the next meeting of the Federal Open Market Committee, during which many analysts expect that the FOMC members will vote to raise the federal funds rate for the first time since June 2006.

An increase in the federal funds rate would then push interest rates higher.

Lending credence to the predictions of a Fed rate hike is the groundwork seemingly laid out by the Federal Reserve and its chair, Janet Yellen, who on several occasions has referred to December’s meeting as a real possibility for a rate hike.

So what would be the impact of a Fed rate hike on housing? According to Mark Fleming, housing expert and chief economist at First American Financial (FAF), the very expectation of a rate hike already negatively impacting the housing market, and an actual rate hike will hit housing even harder.

“The housing market’s capacity for existing-home sales is declining with the expectation of a Fed rate increase pre-adjusting mortgage rates and causing a slowdown in house price appreciation,” Fleming said in a new report. 

“Market capacity remains modestly in excess of actual sales due to leverage-assisted housing asset inflation, which is home price appreciation fueled by low mortgage rates,” Fleming added.

“Rising mortgage interest rates and moderation in house price appreciation were the most important market fundamentals that reduced market capacity this month,” Fleming said. “Now that interest rates are pre-adjusting in response to signals from the Fed for a highly expected increase in December, demand is also declining.”

Fleming states that even a 25-basis point increase in the 30-year fixed-rate mortgage rate, which sat at 3.93% for the week ending Dec. 3, 2015, would see home price appreciation slow down by 1% more than expected without the rate increase. 

“Existing-home sales (would) slow by about 2.5% on annualized and seasonally adjusted basis, a decline of less than 150,000 sales a year, Fleming said. “The housing market isn’t doomed by a Fed rate increase, but demand would fall modestly.”

Fleming’s sentiments were part of a larger report from First American, its fourth quarter Real Estate Sentiment Index, which measures title agent sentiment on a variety of key market metrics and industry issues, including expectations for price changes across multiple property types, and expectations for changes in volume for purchase and refinance transactions.

According to First American’s report, title agents think that first-time homebuyers will be the most impacted by a potential interest rate hike, but not enough to keep sales for first-time buyers from increasing in 2016.

“Title agents view first-time homebuyers as most impacted by a potential interest rate hike, while remaining optimistic regarding the level of sale transactions for those first-time homebuyers in the next 12 months,” Fleming said. “Expectations for future homeownership demand remain positive, despite changing market conditions.”

First American’s report showed that title agents believe interest rates would need to reach 5.1% before significantly impacting primary residential transaction volumes.  

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