This week the Feds raised the interest rate for the first time in 2016 and it was a cautious increase. The question is where are the rates expected to go and how will buyers and sellers react?
SOME KEY TAKEAWAYS
- Rates are likely to hit 4.5 percent to 5 percent next year.
- This could put pressure on buyers to act; there are usually options open to buyers for working around higher rates, but buyers in high-priced markets will have more problems.
- It could also stymie the existing-home sale market as sellers decide to stay put instead of trade up at a higher mortgage rate.
- Should get Buyers off the fence to purchase/Sellers pricing home right!
Throughout 2015 and 2016, buyers enjoyed historically low mortgage rates for many months — which finally began to increase in mid-November, despite predictions that they’d rise sooner.
With such an unusual end to this year, what should real estate agents (and their clients) be expecting in 2017? Inman interviewed seven housing and economy experts to dig into their thoughts about mortgage rates next year; here’s what they told us.
WILL WE SEE RATES GO BACK DOWN?
Short answer: Not likely.
“The day has finally come that people have been talking about for two years,” said Steve Cook, editor of Real Estate Economy Watch, “when you start seeing a steady rise in interest rates. The kind of rates we were getting earlier this year, down to 3.5 percent — those days are over,” he added.
“I don’t believe we’ll see any pullback until after the inauguration, but even the best-case scenario suggests that the historically low rates that have been in place for the last few years are firmly in the rear-view mirror, and that the trend will be toward increasing rates through 2017,” said Matthew Gardner, Windermere’s chief economist.
HOW HIGH COULD THEY GET?
The consensus was that the 30-year fixed rate in 2017 will likely stay in the 4 percent range to 4.5 percent to even 5 percent by year’s end.
Mark Fleming, the chief economist at First American, said that his new estimate of next year’s rate movement “shows mortgage rates getting much closer to 5 percent at the end of next year.”
WHAT WILL BUYERS DO?
“We don’t think rising rates are going to have a very noticeable effect on the housing market, either in terms of new sales or home buying activity,” said Ralph McLaughlin, Trulia’s chief economist.
“Mortgage rates would have to be 7, 8, 9 even 10 percent for the cost of buying to equate the cost of renting. From a financial perspective, buying a home is still a good deal over a 5 to 7 year period,” he added.
WHAT WILL SELLERS DO?
When sellers have bought a home at a low rate, and rates are rising, a phenomenon known as “rate lock” can take effect — sellers have a disincentive to move.
“When rates move dramatically in a short period of time, it’s the existing-home market that slows down,” said Jonathan Smoke, chief economist at realtor.com.
“We’ve had effectively a 30-year tailwind run of declining mortgage rates,” noted Mark Fleming, the chief economist at First American. “At this point in time, maybe they go up or down a little bit, but the long-term trend over the past 30 years has been lower and lower and lower mortgage rates,” Fleming noted.
“Think about how the housing market is composed: 5.5 million to 5.6 million homes sell per year, with an additional million new, so we’re talking somewhere on average of 6 to 6.5 million home sales a year. The vast majority of those home sales come out of the existing market, and what defines the existing market? Existing homeowners. They have to make the decision to supply that home for sale.”
HOW HOT MARKET WILL FARE
Although most buyers probably won’t be overly affected by rising mortgage rates — which are still, relatively speaking, very low — the hotter markets in the country will definitely see a more immediate effect from rate bumps.
“Even a relatively small change from 3.5 up to 4 — even that is already going to start influencing the more expensive markets,” posited Svenja Gudell, Zillow’s chief economist. “So if you’re located in San Francisco, Los Angeles, Seattle, New York, Miami, that might very well have an impact on you because you’re already stretching your budget as it is to get into a home that you can barely afford at historically low mortgage rates.”
“In these places where affordability is already an issue, seeing these small bumps will already have a slight dampening effect, and we’ll see that affect not on all buyers but specifically first-time homebuyers or lower income folks. People who are repeat buyers or buying higher-end homes won’t feel it so much,” she added.
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