For months, rumors have been spreading that the Fed will raise the federal funds rate. Now, we are less than a week away from the meeting of The Federal Open Market Committee where they vote on whether or not to raise the rate. If they decide to, it will be the first raise since June 2006. In turn, interest rates would rise.
You may be wondering how higher interest rates will affect you, and particularly the effects of higher interest rates on housing.
“The housing market’s capacity for existing-home sales is declining with the expectation of a Fed rate increase, pre-adjusting mortgage rates and a slowdown in house price appreciation,” says Mark Fleming, chief economist at First American Financial, in a new report on the fourth quarter Real Estate Sentiment Index.
Interest rates are pre-adjusting and demand may very well decrease if the Fed does hike rates.
“The housing market isn’t doomed by a Fed rate increase, but demand would fall modestly,” Fleming maintains.
Forbes.com gave some more specific examples of exact potential costs to homeowners. With a 30-year fixed-rate mortgage, 10 percent downpayment, $350,000 home and 4 percent interest rate, it would cost home purchasers about $1,503.86 per month plus taxes, homeowner’s insurance and Private Mortgage Insurance. That same 30-year fixed-rate mortgage with a 4.5 percent interest rate would cost a homebuyer $1,596.06 per month – an extra $92.20 per month, or $33,191.54 over the 30-year life of a mortgage. If rates rise to 5 percent, the costs would jump to an extra $184.40 per month and $66,383 over the 30-year life of the loan.
While these numbers look intimidating, Fleming does not believe the effects of higher interest rates on housing will be completely disastrous.
He said, “expectations for future homeownership demand remain positive, despite changing market conditions.”
Realistically, we still must wait for the December meeting to see if these hikes will actually happen. If you have any more questions about potential effects of higher interest rates on the housing market, please contact one of our informed agents at RE/MAX Paradise today!