Last week, the Federal Reserve announced a raise in its benchmark interest rate, as well as a forecast that includes three more rate hikes in 2018. These raises ultimately get passed onto you, the consumer, by way of increased interest rates on the money you borrow from lending institutions.
Rate increases also have an effect on the housing market. If you are thinking about buying or selling a home in 2018, here are a few things to keep in mind while you monitor the effects of these rate hikes.
1) Mortgage rate increase
The trickle-down effect that starts with banks being charged more to borrow money ultimately gets passed to consumers. According to a recent New York Times article, “The most vulnerable borrowers are those either seeking a new mortgage or already holding one with an adjustable rate. Lenders have begun gradually pushing up rates, partly in anticipation of future Fed increases.”
The amount of interest you are charged directly correlates to the amount you are able to borrow. With higher interest rates, buyers may not be able to afford the same size mortgage they did in 2017.
While this increase is necessary in an economy with record-low inflation, it may cause some buyers to reevaluate their options.
2) Property Value
It stands to reason that if consumer borrowing power is curbed, that prices for homes could also come down slightly to align with the buyer’s ability to purchase.
However, that’s not always the case. Mark Palim, Vice President for Applied Economic and Housing Research for Fannie Mae has said, “Rates tend to rise because, in a relative sense, the economy is doing well, incomes are going up, people can afford more and they’re willing to take out a larger mortgage. Intuitively, you’d think that if interest rates go up, of course, house prices go down.
But they don’t.” Even though there is an increase in the borrowing interest rate, the economy remains strong, which could keep housing prices level or even higher in 2018.
3) Savers May Benefit
Got a chunk of change sitting in a savings account? The interest rate hike could help that money grow a little faster. A recent USA Today article explains, “There’s no rule that says that your bank has to pay you more interest simply because the Fed raises rates.
Having said that, interest rates paid on deposit accounts tend to move in the same direction as the Federal Funds Rate. That is, when the Fed rate rises, savings rates tend to rise as well.”
Those saving for a down payment on a home might get a boost in their savings, which can help make purchasing a little easier.
Keeping an eye on interest rates is important when deciding to buy or sell a home. So is finding the right mortgage broker to help navigate any uncertainty you might have.