Slowly & Cautiously: Rate Hikes

Next week The Federal Reserve may decide to raise rates. But just what does this mean for increases down the road given the state of our current economy?

Chairwoman of the Federal Reserve Janet Yellen, has reiterated in recent press releases that the economy won’t be able to sustain higher interest rates in the coming years. Officials from the Fed expect to proceed cautiously before raising rates again. Other countries that have tried raising rates in this past decade have since lowered them back. It is the Fed’s belief that the current state of the economy is such that it can sustain a modest raise, if only for the foreseeable future. The median forecast among 17 officials in September showed they expected the rate to reach 1.375% in December 2016 and 2.625% in late 2017. That would put them on track to raise rates four times next year and five times in 2017 (source: Jon Hilsenrath).

CBS News states, "It may seem counterintuitive, but when the Federal Reserve finally gets around to raising interest rates, the impact on mortgage rates should be negligible. After all, the last time the Fed was hiking, from mid-2004 to mid-2006, mortgage rates rose only a small amount, half a percentage point. Federal Reserve Chair Janet Yellen has signaled that the central bank plans to soon boost the federal funds rate -- which banks charge each other to lend funds -- likely at its next meeting in December. After that, she has indicated that the Fed will increase the fed funds rate only gradually, perhaps a quarter-point at a time. But few borrowers realize that the Fed's impact on longer-term rates, such as those for home mortgages, is muted to nil. In fact, "15- and 30-year mortgage rates could as easily go down as up," said Jason Lina, lead advisor at Resource Planning Group in Atlanta." 

Mortgage Apps Decline: Mortgage Rates Ease

Results of its Primary Mortgage Market Survey® by Freddie Mac, showed an average 30-year fixed mortgage rate declining slightly leading up into this Thanksgiving holiday. The average 30-year fixed rate mortgage hasn't budged above 4 percent since the week of July 23rd, which has helped affordability for prospective homebuyers in wake of increased home prices.

This behavior is the result of low levels of inventory in many markets. Mortgage applications however have been a bit of a mixed bag in the later part of November. The holidays have already put a split in market data as application activity was reported down by nearly 3.2 percent. This data includes adjustment for that week's Veterans' Day holiday. The Refinance share of all mortgage applications increased very slightly, nearly .01 percent. The seasonally adjusted Purchase Index dipped 1 percent from the previous week but rose 5 percent on an unadjusted basis. An interesting time to say the least, but leaves opportunity for seasonal gains before the new year.

(data according to the The Mortgage Bankers Association’s Market Composite Index.)

First-time Buyers Have Not RSVP’d to the Recovery Party

On Thursday the National Association of Realtors said the share of first-time buyers is at the second lowest level in over 30 years. The 2015 Profile of Home Buyers and Sellers reveals a home buying market driven by repeat buyers within two income households. Historically first time buyers constitute nearly 40 percent share of primary home purchases but according to NAR's survey this trend has declined for three consecutive years to 32 percent.

There are several reasons why there should be more of these buyers in the market. These reasons include low interest rates, healthy job prospects for college graduates, and the increasing costs to rent. However there are many obstacles slowing first-time buyers down. 

Increased rental amounts paired with current home prices are diminishing the ability to save for a down payment. This is coupled with low inventory for new and existing-homes in this buyer's price range. 

31 is the median age of a First-time buyer, which remains unchanged since 2013. This home buyers median income was $69,400, up $1,100 from 2014. The typical first-time buyer purchased a 1,620-square-foot home (1,570 in 2014) costing $170,000. With the median amount of student loan debt for all buyers at $25,000, it's likely some younger households with even higher levels of debt cannot afford to save for an adequate down payment or at the very least, have decided to put off buying until their debt is more manageable.

The Result of a Positive Jobs Report

Friday’s favorable job report is a positive, albeit scary lead into potentially higher mortgage rates. The Federal Reserve could very well raise interest rates sooner than later. While we’ll have to wait until December 15th & 16th, it’s important to move now if you’re at all hesitant about locking in the best rate possible.

With the change incoming, there’s a list of fundamental questions consumers will begin to ask their Loan Officer, like: why do interest rates matter and does that mean for the typical family purchasing a home? While interest rates rise, responsible buyers will most likely still enjoy the same level of access to low rates as well as loan programs. Banks, as it often happens, will likely demand higher interest payments from lesser qualified borrowers, but still approach the market aggressively. 

"From a consumer standpoint, even after a potential rate hike, rates will remain at historically low levels. Borrowers need to realize that mortgage rates moving from the 3s to 4s is not the end of the world, and that the affordability index remains very high." said Louis Navellier, chairman of money management firm Navellier & Associates in Reno. 

The question we should all be asking is: should rates rise, who will the clear winners be? Home sellers for one. “Though it's a bit counterintuitive, higher interest rates could actually be good for home sales at the beginning of any period of rate increases. "It may cause a flurry of activity as buyers look to get in a new home before future rate hikes hit," said Whitney Fite, President of Angel Oak Home Loans in Atlanta.” Shoppers with good credit are second. “As long as you have a good credit history, you should still expect to see 0% APR promotional deals at your local car dealership or furniture store, said Greg McBride of Bankrate. The terms may vary slightly over time, for instance moving to 0.5% instead of 0% flat or with financing for 12 months instead of 18 months, he adds. But "those with good credit or who shop around, will always get attractive promotional offers," McBride said.”