It is my job to keep my clients informed of market conditions. I feel strongly about all of the topics that I write on, however, this one is particularly important as it has vast ramifications for the American homebuyers future and the changes will take place this year.
On September 17th we will all find out if there will be a mad scramble to buy up all the Real Estate or the housing market will still have time before the other shoe finally drops. This is the day the Federal Reserve will announce its decision on the future of US interest rates. This will mark the anniversary (a not so merry one) of when the Lehman Brothers meltdown happened 7 years ago. This was the event that sparked the great recession and drove the interest rates down.
The Fed has not raised rates at all since 2006. The rates have been kept low mainly in order to incentivize home buyers to purchase to bring back the housing market and improve the economy as a whole. Now the economy has seen significant growth and the Fed sees that it is time to bring the interest rates back up to where they should be.
So how much of an increase in the interest rates are we talking about?
Federal Reserve Chairwoman Janet Yellen is the woman with her finger on the button. “If we wait longer, it certainly could mean that when we begin to raise rates we might have to do so more rapidly,” Ms. Yellen said in response to a lawmaker’s question. “An advantage to beginning a little bit earlier is that we might have a more gradual path of rate increases.” A gradual path, she added, was a prudent approach. Fannie Mae’s (one of the largest lenders in the nation) predicts rates will rise by 30 basis points—or 0.3%—by the end of this year. This means that mortgage rates this year could settle at 4% for a 30-year fixed rate mortgage. So she is not going to push the interest rates up to 6% anytime soon.
To put this into perspective; let’s say you borrow $500,000 over a 30 year period from the bank to finance your home purchase. Right now you might get an interest rate of around 3.7% this means at the end of your repayment you would pay $328,509 in interest. At the end of the year if interest rates go up as projected to 4% at the end of repayment you would pay $359,347. Thats an extra $30,838 that the buyer will have to pay if they wait until 2016 to purchase.
Buy a house? or buy a house and get a Mercedes-Benz CLA to go with it for the exact same price.
Ms. Yellen indicated she was not interested in waiting until 2016 to raise the rate. Market Analysts are showing that the overall market is growing at an annual pace between 2.5% and 3% in the second and third quarters. Meantime, the job market continues to improve, driving the U.S. unemployment rate down to 5.3% in June.
I do not want to seem like the boy who cried wolf so I really researched this. It is my duty to inform my clients of the market and what it means for them. I hope you found this useful and will use it to make the best decisions for you and your family.
Here are some links to more information on these recent happenings and the forecasts of whats to come.