How the Latest and Future Anticipated Rate Hikes Could Affect Home Buying This Year
One of the key factors affecting the 2018 buying season is shaping up to be mortgage interest rates. Lower rates mean home buyers can afford more house; higher rates mean some buyers may have to look for cheaper homes, or put off buying altogether.
But what are today’s interest rates like? And where will rates be by the end of the summer? Or the end of 2018? No one knows the future for certain, but the Federal Reserve has charted a course for higher interest rates and experts have made their forecasts of how they think those hikes will occur.
Here’s a deeper look at how recent and future interest rate increases could affect home buying this year.
The Role of the Federal Funds Rate in Mortgages
The Federal Reserve is responsible for setting monetary policy for the country. One of the main ways this is accomplished is by setting a target range for the federal funds rate, the interest rate at which banks lend to each other to meet their reserve requirements.
In the wake of the financial crisis, the federal funds rate range was lowered to almost nothing, from a previous effective rate of 5.25 percent on June 29, 2006, to a range of 0.00 to 0.25 percent on December 16, 2008.
Consumer credit products like credit cards and mortgage loans are affected by changes to the federal funds rate, and so these interest rates began dropping as well. By November of 2012, 30-year, fixed-rate mortgages had fallen to a historic low of 3.38 percent.
But now it’s 2018, the recession is behind us and the Federal Reserve’s Open Market Committee (FOMC) has been raising interest rates incrementally since December 2015. Along with other factors, this has pushed up mortgage rates.
The Current State of Mortgage Interest Rates
After seven consecutive increases over the last three years, the federal funds rate target range now stands at 1.5 to 1.75 percent, with the most recent increase decided at the March 2018 FOMC meeting. This has mortgage rates ticking up as well.
At time of writing, the benchmark 30-year, fixed-rate mortgage loan has an average interest rate of 4.73 percent, up from 4.58 percent a week ago. The 15-year, fixed-rate loan is also rising and now stands at 4.16 percent. Other popular mortgage products, like the 5/1 ARM (adjustable-rate mortgage) and the 30-year jumbo loan have also been ticking up.
Overall, mortgage rates are higher than they were at the beginning of the year. They’re also higher than they were a year ago. However, it’s important to point out that mortgage rates are still very favorable for buyers by historical standards. Rates above four percent are not as great as rates below four percent, but that’s still a far cry from the rates above 18 percent that were seen in 1981.
The Forecast for Mortgage Interest Rates This Year
We’re now into the second quarter of the year and the first federal funds interest rate hike of 2018. Experts say buyers and sellers should be prepared for a further two rate hikes this year. Moreover, according to minutes from the last meeting of the FOMC, the pace at which interest rates rise could be “slightly steeper” than previously thought.
Turning to where experts thought mortgage rates would go at the end of 2017, it is the more aggressive forecasts of the Mortgage Bankers Association (MBA) and the National Association of Realtors (NAR) that has proved right so far.
Fannie Mae had expected rates for 30-year, fixed-rate mortgage loans in the second quarter to reach 4.1 percent, climbing to 4.2 percent by the end of the year. Freddie Mac had predicted rates of 4.6 percent by the end of the year.
Yet, it is the MBA and NAR whose predictions of 4.5 percent in the second quarter are closer to our current average of 4.59 percent. The MBA further predicted a third-quarter average of 4.7 percent and a fourth-quarter average of 4.8 percent, a trajectory that is certainly possible.
Looking at the pace of activity of the Federal Reserve, the central bank chose to raise rates in December in 2015, 2016 and 2017. Last year, the central bank was especially active, raising rates in March, June and December. In 2018, we’ve had yet another rate increase in March, with two more increases forecast. Will regulators continue this pattern with another summer increase followed by another end-of-the-year increase? It’s impossible to know for sure, of course, but the current forecast points in that direction.
The Impact of Rates and Rate Increases on Buyers and Sellers
So what impact will today’s mortgage rates and future rate increases have on home buyers and sellers? A recent survey by Redfin, the real estate firm, suggests that a rate near or above 5 percent would impact the decision-making of 75 percent of buyers in one way or another.
However, most buyers would not put off a home purchase due to higher rates alone, a consolation for prospective home sellers. About one-fifth said they would increase their urgency to buy before rates ticked up further, another fifth said they would look at less expensive homes and 27 percent said they would slow down their search. Only six percent would cancel their home purchase plans.
On the other hand, budget-conscious buyers should be aware that as rates increase, so do monthly payments and the life-of-loan interest paid. For example, a 30-year, fixed-rate loan of $250,000 at today’s interest rate of 4.59 percent would have a monthly payment of $1,280 and a total mortgage cost of $460,842. Should rates tick up to 4.9 percent, the monthly payment would be $50 higher and the buyer would pay about $17,000 more in interest over the life of the loan.
Waiting too long could cost buyers even more. By 2020, the MBA predicts mortgage rates to climb to around 5.3 percent. Compared to current rates, that same mortgage could cost $100 more per month in payments and almost $40,000 more in total interest.
The future of mortgage rates is far from certain, but the general trajectory suggests mortgages cost more today than they did last year, and they will cost more next year than they do today. For home buyers entering the market this summer buying season, that’s something to keep in mind. For home sellers, it’s likewise important to understand that higher interest rates could price out some potential buyers.
All the same, interest rates are still very affordable by historical standards, and survey results indicate most buyers aren’t too concerned about higher rates and slightly higher payments. Still, for those buyers who do want to save a bit of money, buying earlier this year will likely be better than waiting.