By now you’ve probably heard that interest rates will soon be rising. The media reports simple sound bites such as, “Interest Rates Rise” which is of little help in understanding to which interest rates they are referring—credit card debt, student loan, small business loans or home loans?
Why are the Feds Raising Rates and What will it Mean?
The Federal Reserve rate making the news is set by the Federal Open Market Committee, which is part of the Federal Reserve. It is used as part of a monetary policy to attempt to help smooth the inevitable business cycles that the economy experiences.
When we hear “The Feds are going to raise rates”, it’s important to note that specific change to the Federal Reserve overnight rate affects adjustable-rate mortgages. One must also watch Treasury Notes and Bonds for volatility in fixed rate mortgages.
The Federal Reserve keeping interest rates low helped us all through the 2007-2009 recession and again was employed during the Pandemic to help keep the economy from wild market force swings.
After the housing bubble burst in 2007, conforming loans actually had higher interest rates due to their greater propensity for default, while Jumbo loans enjoyed smaller rates of default as they were often tired to a properties with more equity.
But the Fed needs room to maneuver and raising the rate to more normal levels gives them some ammo in their arsenal in the event they need to employ their interest rate weapon again.
Since the attack on Ukraine, the feds have already signaled that they will slow any rate hikes this year for fear of stalling the economy. Once they begin raising rates it will serve to slow down the current high inflation by dampening spending.
This is a good illustration of how the Feds use this tool during recessions to stimulate or suppress the economy.
What Effect Interest Rate Hikes will have on Home Loans?
As we discussed in an earlier blog, the Federal Reserve rate—does not necessarily mean home loans will follow suit—though some often do.
- The 10 year Note (typically affects 15 year fixed rate mortgages)
- The 30 year Bond (typically affects 30 year fixed rates)
- The Federal Funds Rate (affects Adjustable Mortgage rates)
As interest rates on Treasury notes rise, banks can raise the interest rates on new fixed rate mortgages. That means home buyers will have to pay more each month for a loan which in turn takes away purchasing power. Typically, when interest rates rise, home prices fall. When housing prices fall, the economy slows.
One of the rates most often discussed is the 10-year note. This frequently serves as a benchmark for setting long-term rates like commercial and residential mortgages. This rate is not directly set by the government. It is determined by market forces, often as simple as supply and demand.
Although today’s rates aren’t crazy by historical standards, they are higher than they have been in years, and that’s likely to have a small effect in the housing market — though we don’t see housing prices to declining significantly.
“More than a decade of chronic underbuilding and millions of millennials moving into the homebuying stage of life has created a significant imbalance between housing supply and demand,” McBride from Bank Rate said.“While rapidly rising mortgage rates may temper the demand somewhat, don’t expect home price appreciation to come to a halt. A more modest pace of appreciation is the likelier outcome.
More About Mortgages
Conventional mortgages fall into two main categories: “conforming” and “nonconforming” loans.
Conforming loans are home loans that are purchased by government entities such as Fanny Mae and Freddie Mac and must meet their guidelines such as the amount of down payment. These organizations make the access to more mortgage loans available. These tend to be smaller loans.
The Federal Housing Finance Agency (FHFA) raised the 2022 Conforming loan limits in California. This allows some mortgage loans that were previously labeled “Jumbo” to now be placed in the Conforming loan limit category. Conforming loans in California generally come with better mortgage rates and easier underwriting requirements.
A ”Jumbo” loan is considered a non-conforming loan, when it is in excess of the loan limits allowed for a conforming loan.
What Are The 2022 Conforming Loan Limits in the Bay Area?
San Francisco, San Mateo & Santa Clara all have the highest limits available—$970,800 for a conforming loan.
What Does this Mean for You?
If you’re a homeowner thinking of selling, higher rates could impact the amount buyers can overbid for your home, as higher rates impact purchasing power.
If you’re a buyer, it means money will cost you more going forward so finding a home sooner rather than later could save you thousands of dollars. Every time there’s a tick up in interest rates buyers get more anxious about completing a purchase—so expect more short-term competition.
Our belief is that a modest rise in the fed rate will have a nominal effect on interest rates, but since lenders can react in any way they choose, all bets are off to definitively say how the upcoming rate hikes will impact our local housing market.
Drew & Christine Morgan are REALTORS/NOTARY PUBLIC in Belmont, CA. with more than 25 years of experience in helping sellers and buyers in their community. As Diamond recipients, Drew and Christine are ranked in the top 50 RE/MAX agents nationwide and the top 3 in Northern California. They may be reached at (650) 508.1441 or emailed at email@example.com.
The information contained in this article is educational and intended for informational purposes only. It does not constitute real estate, tax, insurance or legal advice, nor does it substitute for advice specific to your situation. Always consult an appropriate professional familiar with your scenario.