There has been a lot of hype recently over the Federal Reserve increasing interest rates. It’s no longer speculation. It has happened and rates will continue to rise in the future. The first day of the interest rate rise saw stocks and bonds both fall in value as individuals and institutions rushed to sell off old bonds at the higher rate and adversely lowered bond yields across the board in their enthusiasm.
You may wonder, how does this affect my home or how is this going to affect me if I want to buy or sell? Should I be worried? The answer is no. Not yet. With a little understanding of how the market works, I’ll explain how you can take advantage of the hype. I’ll keep it as simple as possible as this isn’t a numerical analysis but an explanation for the average American.
Let’s begin with how mortgages are financed to get an idea of how and why interest rates affect the real estate market. Financial institutions like your bank offer financing and compete for your business. To some extent they can adjust their offer to fit your needs and come to an agreement on a mortgage loan. Once you and your institution agree on the terms and the deal is sealed your mortgage becomes a commodity that can be bought and sold on the market.
Your mortgage gets bundled with other mortgages, sliced and diced and sold in packages to investors who are expecting a return based on a fraction of the interest rate on the mortgage if you don’t default. These are called mortgage backed securities. I won’t go into details but they are similar to bonds. Freddie Mac and Fanny Mae snatch these up at the top tier and their value determines the general rate on the market.
As interest rates in the market go up, mortgage interest rates follow suit on new loans. This is why there is a small delay in the housing market vs the bond market. The savvy individual can take advantage of this.
Still with me? Just a little more on how notes and bonds affect mortgage interest rates then, how you can make the most of it in the real estate market.
The interest rate on a fixed-rate mortgage is fixed for the life of the mortgage. However, on average, 30-year fixed-rate mortgages have a lifespan of only about seven years. This is because homeowners frequently move or will refinance their mortgages.
Mortgage-backed security prices are highly correlated with the prices of U.S. Treasury bonds. This means the price of a mortgage-backed security backed by 30-year mortgages will move with the price of the U.S. Treasury five-year note or the U.S. Treasury 10-year bond based on a financial principal known as duration. In practice, a 30-year mortgage’s duration is closer to the five-year note, but the market tends to use the 10-year bond as a benchmark. This also means that the interest rate on 30-year fixed-rate mortgages offered to consumers should move up or down with the yield of the U.S. Treasury 10-year bond.
So, the Fed is raising the interest rates. How does this affect me?
First of all, this first increase was only .25%. Not much but enough to see some interesting things happen in the market as it reacted to the initial hike. Most of this was due to speculation and anxiety. The Fed says they will keep the increases slow and gradual. There really isn’t any need to panic. On the contrary, these actions are stimulating the market as people must react to a market that has been relatively unchanging for the past 5 years.
This will however put increasing pressure on the housing market as interest rates increase. The idea of buy now before rates increase has become a reality suddenly. Although the rate change wasn’t drastic, the fact remains the same. The market will be changing in the future.
Buyers will be looking for homes sooner than later. You may have seen a lot of sell now or buy now in the past. Well, it’s time to take another look at that idea. More buyers will be entering the market to buy now before interest rates go up more. It doesn’t matter if interest rates haven’t gone up that much. Just the idea that rates are rising will spur some to shop for a home sooner than later.
More home buyers means less houses on the market. Are you smiling yet? You should be because this means you are likely to sell for a higher price. It’s basic economics, supply and demand. Less houses to choose from and it becomes a sellers’ market. It’s been a buyers’ market til recently.
A bit of advice, get your home on the market before the new year or as soon as possible if you plan to sell and then buy another house. That way, if your home sells quickly, you will be ready to take advantage of the new year’s influx of homes for sale.
Take a deep breath. It’s not as bad as the hype makes it out to be. Even with the interest rate increase, mortgage rates are still historically low. Yes rates will continue to rise but you have time if you are still working on saving up a down payment or improving your credit score.
Now is the time to seriously consider starting to look at the homes out there and getting prepared to buy if you have plans to be a home owner in the future. Yes, it is better to get it while the getting is good but don’t get in over your head in your rush to beat the market. The idea is to be proactive in your approach instead of I’ll buy a home when I can. You should be actively working on being ready to buy. Setting your goal, allocating your resources and adjusting priorities can make a big difference.
Bottom line, you can wait if you need to but don’t wait too long.
Hopefully this addressed some concerns you may have about the future of the housing market and put a few fears to rest. We’ll keep you updated as the weather changes. If you like this article be sure to like and share. Til next time, happy home shopping!