The first thing to keep in mind is that the Federal Reserve, commonly referred to as the Fed, keeps a very close eye on the economy and has kept the rate low for so long specifically to help the economy improve in a stable manner. Judging by past history, there will likely never be a sudden, massive increase. Instead, the rate increases will come in small, gradual increments, and if there is a bad reaction, the Fed will re-evaluate its plan.
“After the dot-com recession it took the Fed three years to raise the funds rate from the then-low of 1 percent to 5.25 percent, where it sat on the eve of the financial crisis,” according to Ian Salisbury of Time Money. “Given the continued weakness of the economy, the Fed might act even slower this time around.”
When that crisis did occur, the Fed determined that it needed a new plan to help end the recession. This plan took the form of carefully maintained, super low interest rates.
“Perhaps no sector has benefited more from ultralow rates than housing, which was devastated by the real estate crash,” according to Paul Davidson of USA Today.
Because people associate the recession with the housing market, and because the market was impacted greatly by the Fed’s low rates, many people are anticipating a big impact on their mortgages following the increase in interest rates.
“But today’s housing market is supported by far more than low mortgage rates — namely steady job and economic growth,” says Davidson. “What’s more, 30-year mortgages are priced off 10-year Treasury note yields, which do rise as short-term rates climb, but not as steeply.”
The bottom line is that the Fed would not be changing the interest rate if it didn’t think the housing market could handle it. The overall economic climate of today is much stronger than it has been in recent years, but this does not mean that the cost of owning a home will not go up at all.
“Doug Duncan, chief economist of Fannie Mae, the giant government-sponsored funder of mortgages, expects [the December] Fed hike of a quarter of a percentage point to have virtually no immediate impact on Treasury or mortgage rates, noting that markets already have priced in the move,” says Davidson. “Assuming the Fed raises its rate by a percentage point over the next year, Duncan expects 30-year mortgage rates to drift from 3.9 percent to 4.1 percent during the period. That would boost the monthly cost of a typical $225,000 mortgage by $26, to $1,454 — not enough to deter most buyers.”
As the saying goes, when it comes to houses, the most important factor is “location, location, location.” This is equally applicable when it comes to analyzing interest rates. Some markets will experience much more of an impact than others, so it is important to think about how your area’s mortgages are changing in order to assess how you will be affected.
“To see how prices might be hit by rising rates, real estate consultant John Burns ran the numbers assuming the rate for a 30-year fixed mortgage gradually moves back up to 6 percent from the current average of just more than 4 percent,” states John W. Shoen for CNBC. “The result is that some very hot markets — including San Francisco; San Jose, California; and Miami — may be overvalued by more than 20 percent.”
So, if you live in one of those areas, you may want to speak with your financial adviser about what you can expect in the upcoming years. This can help you stay stress-free and budget appropriately. You may also want to look into which markets will be impacted the least.
“In other markets, where prices haven’t risen nearly as fast, homes are still undervalued — even if mortgage rates move back up to 6 percent,” states Shoen. “Those undervalued markets include Chicago, Atlanta and Detroit.”
So, it is clear that this change, while important for the continued growth of the economy, won’t have a tremendous immediate impact on most people’s mortgages. And as always, if you are wondering about your specific financial situation, talking to your financial institution is your best bet.
