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Fed rate hits a 10-year high and lights a fire under homebuyers

September Federal Reserve rate hike
Reading Time: 3 minutes
Dec. 19, 2018.

Heads up, homebuyers. President Trump discouraged it, but the Federal Reserve still went ahead with its expected interest rate increase for the fourth time in 2018. The Federal Reserve’s benchmark rate, while historically low, now sits at its highest point in a decade, between 2.25 and 2.5 percent.

Even though a Federal Reserve rate increase often brings a mortgage rate increase along with it, mortgage rates just dipped. Experts believe mortgage rates may be dropping or holding steady because the Federal Reserve is wavering on raising rates as fast it first suggested. Homebuyers who buy now before mortgages rates rise again could see a nice boost in buying power.

Homebuyers jump — before Federal Reserve rates jump again

Borrowing costs are moving right now for three main reasons: the very strong economy, higher U.S. government debt issuances, and global trade tensions,” Freddie Mac’s chief economist Sam Khater said.

Can homebuyers benefit from rising rates? Yes, when they move quickly. Since mortgage interest is amortized — where payments are spread out over the life of a loan — higher interest rates can add to the cost of buying. At face value, mortgage rates potentially notched upward by the latest Federal rate hike could seem problematic, adding to the cost of a house.

But rising rates have a few buyer-friendly benefits:

  • Faster buying and closing. Interested homebuyers may be more likely to act, before the next anticipated Federal Reserve rate increase. Ellen Zentner, Chief U.S. Economist of Morgan Stanley and award-winning economic forecaster, predicted four total Federal Reserve rate hikes for 2018 and two more in early 2019. Buying sooner and working with a mortgage lender who offers a 10-Day Ready closing could expedite the process from contract-to-keys in a matter of weeks.*
  • Less competition. Rising mortgage rates could also encourage some buyers to hold off and cause home sales to drop. Fewer home sales drive down prices, so the truly motivated buyers could potentially snatch up their dream house — and even a bigger house — at a lower price.
  • Room for negotiation. The summer’s super-tight housing market has loosened. Now, sellers looking to move their property may be flexible and more willing to negotiate. This may also be an ideal time for a buyer to ask a seller to pay for their closing costs, reducing the amount of upfront cash needed to buy a house and ensuring the deal happens.

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“While changes to the federal funds rate won’t necessarily spur further increases in mortgage rates, mortgage rates are expected to rise nonetheless,” Mark Fleming, First American chief economist, said. The 30-year, fixed mortgage rate could rise as high as 5.8 percent in 2019.

Here’s a quick recap of the latest Federal Reserve rate changes:

  • December 2017: The Fed increased interest rates from 1.25 to 1.5 percent — the fifth rate rise since the Federal Reserve slashed its interest rate to almost rock-bottom during 2008’s Great Recession.
  • March 2018: The Federal Reserve rate moved with another quarter-point rate increase, from 1.5 to 1.75 percent. At that time, the Fed rate hit its highest point in 10 years.
  • June 2018: Following the trend, the Federal Reserve hiked its rate another 25 basis points, rising from 1.75 to 2 percent. This time, the Fed’s benchmark interest rate rose above the rate of inflation for the first time in a decade.
  • September 2018: As anticipated, the Federal Reserve interest rate rose by a quarter-point from 2 to 2.25 percent. This marked three out of four predicted rate hikes for the year, with rates again reaching a level that hadn’t been seen in 10 years.
  • Read what loan officers have to say about the Fed rate’s climb and the good news and bad news for homeowners and homebuyers.

Mortgage rates normally follow the same direction as long-term bond yields. A Federal Reserve rate hike can impact mortgage rates indirectly. All these changes indicate the economy is getting stronger, Fleming explained. So, home sales are still likely to increase, even as rates rise, because of a healthier economy.

The July 2018 First American Real House Price Index (RHPI) shows that housing prices have risen 12 percent year-over-year, while average household income also increased. Household earnings are up 2.9 percent from July 2017 and 53 percent from January 2000. This leads to an overall consumer homebuying power that’s 2.2 times greater than January 2000.

Higher mortgage rates, while still historically low, plus higher average household incomes mean that most homebuyers are still in a good position to buy a home in their price range.

Forget about rising rates and fly home fast

If you’re ready to buy, you can stop worrying about rising rates and get home faster than you ever thought possible. Download LoanFly to get the party started. Get prequalified in 15 minutes.** Get access to your free credit report. Get questions answered by a local loan officer. And get ready to own in 10 days.*

*10-day close not typical. Not all loans will close in this timeframe.

**During normal business hours.

For educational purposes only. Please contact your qualified professional for specific guidance.

Sources are deemed reliable but not guaranteed.