The Federal Reserve is ending 2015 in a big way, finally introducing increased interest rates, nearly a decade after the previous rise during June of 2006. That move has led many economists to ponder the effects of the move upon banks, construction projects, and automotive sales. No market is more likely to feel the effects than that of housing, as mortgage rates inevitably change to mirror the Federal interest rate.
No one, from Fannie Mae to the Futures Market, is entirely sure where typical 30-year mortgage rates will end up by the end of 2016, with estimates ranging from 4.2 percent to more than 5 percent. There’s a wide difference between those digits but one fact remains the same: They’re both increases from current levels.
Although the Fed has made its projections for years to come, a few prognosticators are less than convinced interest rates will continue to rise, with some even predicting that they’ll fall back to zero by 2019. That theoretical decline won’t alter the state of homebuying and mortgages during 2016 however, and here are three major impacts the rate hike will have on potential buyers in the next 12 months.
Buyers, both new and those already owning a home, will probably be forced to keep their goals humble. Economists are looking at a 5 percent rise in housing prices during 2016, which isn’t a big change from 2015, however the changes in mortgage rates will make homes far tougher to afford than the 5 percent number indicates.
Consider a mortgage rate on a $287,000 home in Fort Lauderdale. As of December 2015, buyers could lock down a mortgage with a 3.95 percent rate for that home. Depending on what hypothetical 2016 mortgage rate you subscribe to, the hike will increase the amount paid on the home yearly by hundreds or even thousands of dollars. The higher rates will also require a larger down-payment up front.
If buyers aren’t comfortable with higher upfront or monthly costs, they’ll reconsider and opt for a cheaper home, as opposed to the larger/pricier model they may have considered during 2015.
Those who already own homes are probably looking for an upgrade when they hit the market. As we mentioned above, increased mortgage rates will make higher-priced options less appetizing due to the bigger down payments and higher monthly payments. The predicted 5 percent increase in housing prices won’t be enough to push them toward a move.
Another element that will keep current homeowners happy in their current abode is rate lock, or the fear that they’ll be sacrificing a better fixed rate if they opt to switch homes. Many homeowners may have been willing to shop around in the last few years, despite having debt remaining on their current mortgages, because the low rates that followed the financial crisis of 2008 offered a chance to save money on homeownership.
Now, at the sign of increasing rates, homeowners are willing to suck it up and hold tightly onto their established rates.
The result for those who do decide to move on? The lack of houses on the market, due to homeowner conservatism, will make the market more competitive. Housing sales are still expected to rise by 5 percent during 2016, but that’s a leveling-off from the 8 percent seen during 2015.
Fixed-rate mortgages have always had fans in those who want to know, upfront, how much they’ll be paying for a home for the next 15, 20 or 30 years. Adjustable-rate mortgages offer a number of advantages that fixed-rate can’t, such as lower initial costs and the chance to qualify for higher loan amounts. However, they also require you to understand that rates could change suddenly. Confident buyers might have jumped at the opportunities offered by adjustable rates in years past, but the looming hikes may inspire more applicants to play it safe and take what they can get in 2016 before rates get any higher.
That said, doubters still exist with regards to how long the Federal Interest Rate will stay “up.” Although it’s hard to imagine getting a better rate than 2013 offered, buyers may be willing to sign on for an adjustable-rate mortgage in 2016 with the intent of riding it out until rates fall again.