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.