This article originally appeared on Inman.com
After seven years of some of the lowest interest rates in recorded history, the Federal Reserve has decided to raise the key Fed Funds Rate by 0.25 percent, which is causing some to be concerned that it will lead to a jump in mortgage rates and negatively impact the US housing market.
So, the question everyone wants to know is, do we need to worry about interest rates leaping?
While I expect there to be some volatility in rates for a while, I don’t believe the real estate market will implode in a rapidly rising interest rate environment. So, yes, interest rates are going to rise modestly, but no, I don’t think we need to be overly worried about it.
To qualify this statement, we need to understand that mortgage rates do not run in “lock-step” with the Fed Funds Rate. Although the Fed Funds Rate is a bellwether for the greater economic environment, there have been times when these two rates have moved in opposite directions, such as we saw in 2004/2005.
It’s also important to understand that while interest rates for revolving credit, such as credit cards and home equity loans, are tied to the Fed Funds Rate, non-revolving loans – like mortgages – are not. Mortgage rates are tied to bond yields – specifically the 10-year treasury.
So what do I think will happen?
I believe interest rates will rise above 4 percent, but we will not see a sharp spike in rates. The Fed has stated that any upward movement in the Fed Funds Rate will be slow and steady, and will reflect the greater economy. And I believe that mortgage rates will follow suit. Additionally, mortgage rates have already moved higher in anticipation of an increase in the Fed Funds Rate.
That said, it is worth noting that any weakness in the global economy can actually have a downward effect on interest rates. This is referred to a “flight to quality”. In essence, investors seek safe haven during times of economic uncertainty. If markets outside the U.S. continue to underperform, there will likely be increasing demand for bonds which will drive up their price and drive down interest rates. Between China, the Eurozone, war in the Middle East, and a massive drop in oil prices, it's certainly possible that the price of mortgage backed securities could rise, leading U.S. mortgage rates lower.
Interest rates could not realistically stay at their current levels forever. But an increase should not be a great cause for concern. Yes, an increase makes mortgages more expensive, but not to a point where they will have a negative effect on home values. That said, the rate of home price growth will undoubtedly slow in the coming year, but that isn’t necessarily a bad thing.
A little perspective might help: the average rate for a 30-year loan in the 1970’s was nine percent. It was 13 percent in the 1980’s and eight percent in the 1990’s. And yet people still managed to buy and sell homes throughout those years. With that in mind, the rate increases we’re likely to see in 2016 are nothing to fret over.
The increase in the Fed Funds Rate should be taken as a sign that our economy is expanding and is a preemptive move to limit anticipated inflation. While interest rates have risen from their all-time low, they are still remarkably favorable. And will remain so through 2016.
Matthew Gardner is the Chief Economist for Windermere Real Estate, specializing in residential market analysis, commercial/industrial market analysis, financial analysis, and land use and regional economics. He is the former Principal of Gardner Economics, and has over 25 years of professional experience both in the U.S. and U.K.
Strong sales continue to whittle down a dwindling supply of homes. The lack of supply to meet demand kept driving home prices upward in September. While the Puget Sound area saw steady appreciation over a year ago, there are signs that that the frenzied level of growth may be starting to moderate – good news for a market that was starting to look unsustainable. Click images below for full reports.
The Eastside continues to lead the region in home values. The median price for homes sold in September was $680,000, an increase of 12 percent over a year ago. Sales were up as well, with many homes selling within days of being listed. As a result, inventory is at historic lows, with only a six week supply available. That is far below the three to six months of supply that is considered to be balanced.
Home prices rose a moderate seven percent in King County as compared to last year. The median price for a single family home in September was $490,250. Areas farther from the urban core are relative bargains, with the median price in Southeast King County coming in at $344,975, and at $304,000 in Southwest King County. Inventory remained tight throughout the region, with just five weeks of available supply.
The Seattle market continues to be very hot. Homes are snapped up as soon as they come on the market. As a result, the city has under a month of available inventory, the lowest in the region. Home prices climbed 10 percent over last year to a median of $571,000. That increase hasn’t seemed to decrease demand from buyers, who have become accustomed to facing multiple offers on newly listed homes.
The real estate market traditionally cools off in the summer, but August saw a continuation of the market’s hot streak. Home prices increased by double digits over a year ago, fueled by strong demand and the lowest inventory in more than a decade. Rising prices are kindling hopes that more sellers will be willing to put their home on the market.
Home values on the Eastside continue to be the highest in the region. The median price for homes sold in August was up 11 percent to $672,000. Very limited inventory translated into brisk sales as buyers snapped up homes at every price point. A $3.7 million home on Yarrow Point sold in just four days after being listed.
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The median price for a single family home in King County was $499,950, a 14 percent increase over last August. Inventory has inched up, but the five weeks of existing supply is far below the three to six months of supply that is considered to be balanced. Condo sales were strong, with 22 percent more sales than a year ago.
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Seattle home prices have exceeded their 2007 peak. The median sale price for single family homes sold in Seattle in August was up 15 percent to $575,000. With just three weeks of available inventory, supply just can’t meet demand. Multiple offers and escalation clauses were the rule rather than the exception here.
Click image to view full report.
In July, the U.S. saw the fastest rate of single-family home starts since 2007. Housing starts across the U.S. in July rose 0.2 percent to a seasonally adjusted annual rate of 1.21 million homes, the Commerce Department said Tuesday. According to The Seattle Times, "construction of single-family homes account for all of the gains, shooting up 12.8 percent last month to the highest rate since December 2007."
This means more confidence from real estate developers and an increase in construction jobs bolstering our housing market. Year-to-date, housing starts have risen 11.3 percent.
Confidence is also spreading to the retail market as homeowners feel they can spend a little more to improve their homes and get top dollar when they sell. Home Depot reported a record number of transactions over the last three months. "When consumers believe their home is an investment, not an expense, they spend differently. We are seeing that," said Carol Tome, Home Depot's chief financial officer.
The market is continuing to grow; however, the report also showed some of the potential limits of further gains as the number of building permits fell. The decrease is likely due to some pullback after months of gains and the continued low inventory (especially in the Seattle area) and increase in home prices.
Our housing market is definitely booming and repairing itself after the Great Recession, but the lack of inventory may cause a slow-down in homebuilding activity. However, homeowners are still confident in the values of their homes and there's no doubt that this year has held the growth we predicted it would.