Your home: Only two months left until the rate hike

With the Federal Open Market Committee scheduled to meet on Sept. 16 and 17, they seem to be poised to announce an increase in the federal funds rate. This would be the first interest rate increase by the Fed in nine years. An increase has been a long time coming. It feels like the real estate community has been anticipating an increase for years now. Not because of any facts that support an increase. Simply because we all could not believe that rates could stay so low for so long. But they have. Until now.

At the June meeting, the committee confirmed that they are on track to raise rates based on the improving economy. Janet Yellen, the Federal Reserve Chair, is maintaining her mysterious position as it pertains to when exactly rates will increase. “It would be wrong if we were to provide you a road map,” Yellen said following the June meeting.

I was curious what the word on the street was in the lending world, so I had a conversation with Mike Miles of Fountain Mortgage here in Prairie Village. I asked Mike if his sources were telling him that rates are going up this year. He said, “It is well known that the Fed will raise rates in 2015. Once the increase is announced, the bump in rates that we feel could be smaller or larger depending upon how individuals and institutions respond to the news and to what degree they react.”

We discussed Greece and other international turmoil and if he felt that could delay an increase in rates. “I would choose to base my decisions on information from domestic sources. Waiting to see if economic turmoil overseas could have an effect on a rate increase is a huge risk.”

So let’s back into this for a minute. If rates are going to increase in mid-September and here it is mid-July, then we only have two more months of historically low interest rates. That is not much time. With the average real estate transaction taking approximately 45 days from contract to closing day, there is not much time to find a home first.

And what if you need to sell your current home first? You have even less time. If you need to sell before you buy, you are on borrowed time at this point. Not only might you have to pay a higher interest rate when you turn around and purchase a home, you may also have the size of your buyer pool affected by an increase in interest rates. Historically when rates increase, it can cause a stall in the market. Some buyers, who are currently renting, may choose to stay in their rental as opposed to purchasing a home. This stall cannot only have an affect on the size of your buyer pool, it can also cause downward pressure on pricing. Talk about a one-two punch. Not only might you have to pay a higher interest rate on your purchase, but you may have to sell for less as well.

When asked what interest rates might look like in the foreseeable future, Miles had this to share from the Mortgage Bankers Association. Here is their forecast for the rest of 2015 and the first half of 2016.

30 year fixed mortgages
Q3 in 2015 = 4.1%
Q4 in 2015 = 4.4%
Q1 in 2016 = 4.6%
Q2 in 2016 = 4.8%

The moral of the story is that whether you are considering a home purchase in the near future or perhaps a refinance, now is the time to act. Based on the MBA’s predictions, almost 10 percent of your buying power could be eroded by the second quarter of 2016. Don’t wait. Act now.

Your home: Say goodbye to historically low interest rates

Interest Rates - scrabbleFinally, after much anticipation, the Fed announced last Wednesday that they would begin tapering the governments purchases of treasuries and mortgage backed securities. And when they say taper, they mean a slight taper. The purchases are set to go from $85 billion to $75 billion per month. Although it is not a huge change, the stock market clearly interpreted the move as a vote of confidence for the US economy and ended on a record high.

So what does this mean to the consumer?

Chairman (for a few more days) Ben Bernanke also shared during his announcement Wednesday that rates would not go up until 2015. That is almost comical. Especially considering that rates jumped up 3/4 percent right before the announcement. Almost as if the markets were anticipating the taper. Now will we see a huge jump in rates in 2014? Probably not. But will rates go up? Most experts say “yes.”

I have shared before that on average for every 1 percent that rates increase, a buyer will lose 10 percent of his or her buying power. So let’s not underestimate even a 3/4 point jump. Every little bit counts. Therefore, if a home purchase is on your calendar for 2014, perhaps you should start sooner than you think. You will have less buyer competition in January than in April.

On a side note, housing starts in November were up 22.7 percent — much higher than expected. It was also the highest level for starts in more than five years. It is great to see new construction moving along at such a pace. Housing starts are typically one of the last signs of a true housing recovery.

For you sellers out there, fast-paced new construction means two things: more competition and a higher standard of updates. As these new homes are popping up in all directions, buyers will have more options. Some buyers will choose new over resale. And some may still choose resale but will be exposed to all of the newest trends in decor and finish work. New construction always sets the bar for the resale market. Granite counter tops were unheard of in the resale market until they became commonplace in the new home communities. So resale sellers beware. Your buyer pool might be reduced by this new competition or at least raise the bar for housing updates and what today’s buyer will come to expect.

Overall, I am very encouraged by our market conditions right now. 2014 looks to be an exciting year in real estate and we are looking forward to sharing more information with you in the new year. As always, thank you for supporting the PV Post and our column. If you have any topics that you would like to see discussed in 2014, please email me.

The Taylor-Made Team wishes you all a very Happy New Year!

Photo Credit: LendingMemo on