The Federal Reserve raised interest rates today, finally, and they’ll probably do it again soon. Fed Chair Janet Yellen and her crew don’t set mortgage rates, but their actions can make it more expensive to get a home loan. What they did today was raise short-term borrowing costs from near zero to a little above zero.
“Remember, we have very low rates and we made a very small move,” Yellen said. “It’s important not to overblow the significance.”
Here’s how to look at it: The move is a vote of confidence in the U.S. economy. In 2008, the Fed cut rates to near zero in an effort to boost housing, consumer spending and the rest of the economy. Now we’re back on track. Unemployment is low, gas prices are low, debt is low and wages–finally–are picking up.
Yellen & Co. are taking it slow to avoid a big, abrupt increase in rates like the one that shook the market in 2013, when an epic U.S. budget showdown–the taper tantrum–pushed 30-year, fixed-rate mortgages from 3.9 percent to 4.5 percent in a single week.
It was the biggest weekly increase in more than three decades. Home sales slumped. That won’t happen this time. Yellen’s favorite word is “gradual.” Any uptick in mortgage rates will be gradual, too.
What Does It All Mean?
For homeowners, not much. Most of us have fixed-rate mortgages and the Fed’s move has no effect on those loans.
For buyers, loans eventually will get more expensive. It won’t happen tomorrow or next week. But rates will go up. Let’s see what happens when they do.
Last week, the average rate on a 30-year mortgage was 3.95 percent, near historic lows. Let’s call it 4 percent just for kicks. At that rate, with 20 percent down on a $400,000 house, a buyer’s monthly mortgage payment would be about $1,528.
If rates reach 4.25 percent, that mortgage payment would increase $46 a month, to about $1,574. At 4.5 percent, the mortgage hits $1,621.
We think 4.5 percent is a long way off. Remember Yellen’s favorite word (gradually). The Fed won’t hit the gas pedal until they’re sure the economy remains on track.
“You know how you get to a certain safe speed on the highway? That’s where they are,” Redfin Chief Economist Nela Richardson said. “They’ll be riding the brakes for every little bump in the economic data.”
Here’s the Dark Side
First-time and lower-income buyers already struggling to afford a house will feel pain. For someone who can just barely qualify for a mortgage, a $50 or $100 increase in monthly costs could be enough to shut the door on homeownership for now.
So far, buyers aren’t worried. In a Redfin survey last month, only 6 percent of them said mortgage costs were a top worry.
Eventually higher mortgage rates should mean slower price increases, and a healthier economy will mean higher incomes. Demand for housing will lead to construction, which creates jobs and a grows the supply of homes. Today we learned that construction rebounded last month, with starts on single-family houses at its highest since January 2008.
“Housing has been recovering very slowly, but the demographics would point to significant upside,” Yellen said. “My mainline forecast is for gradual recovery, but there is upside risk there.”
Translation: Residential construction–and the jobs and spending that come with it–will pick up as first-time buyers, growing families and retiring baby-boomers start buying, moving up, or trading down.
And that “upside risk”? It’s Yellen’s way of saying the housing market might do better than she thinks.
For now, remember this chart:
Lorraine.Woellert@Redfin.com
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