Friday, October 14, 2016

Will the Fed Raise Rates in December?

Once the election is over, the Fed will decide what to do about these unprecedented low interest rates. Many analysts are suggesting a rate increase is eminent. This is a concern for many people. If they do raise the Fed rate it will have a negative impact on the mortgages but not horribly so. The Fed is smart enough to know that small incremental increases are the only way to 'safely' raise rates. That said if they are going to raise the rates, is it not wise for those thinking about a refinance or a home purchase to act now, rather than later?

Our market is still seeing a price appreciation. It is not a rapid appreciation like we saw last year and into this spring, but it is rolling along at a sustainably healthy 4-6% annually. So people lallygagging around in the housing market will see the price of homes rise by about 1/2 percent monthly and could see an average mortgage rate  increase of 1/4 to 1/2 percent by the end of the year if the Fed raises rates.

Paying more for a house and more interest is not a good combination. Those thinking about a home purchase should strongly consider making their move now. Even if the Fed sits on rates, the monthly price appreciation marches on. The difference of 0.5% seems minor, but that is $1500 on a $300,000 home every month! A quarter point to interest rates will add thousands over the life of the loan. Why not act sooner, rather than later?

Those who are not able to buy now but may be working toward that goal, worry not, rates could go up by two FULL percentage points and still be lower than the 50 year average. It isn't the end of the line if the Fed creeps the rate up a little. In fact it is long overdue. If however a buyer is sitting out there waiting and they are capable of buying now, the waiting serves no real purpose. Below is an excerpt from a past blog post that draws from references I made in my 2010 Book, Don't Panic.

"Many buyers qualified to buy a home a few years ago, but they allowed market fear to get in the way and they hesitated. Now the market has passed them by. When considering an owner occupied property, the time to buy is nearly always now. Yes exceptions are true, buying in late 2007 was not ideal, but one always needs a place to live and even those who bought at the peak before the great crash, still had a home to live in and those folks are now seeing all their equity return. While the home was financially "underwater" it still served its purpose as a shelter. In the grand scheme of things the only bad thing about the value decline was that it limited the ability to sell.

Too many people put too much into the "investment angle" of the home they buy to live in. Yes, we always want to make a sound investment. But unless you are renting out every extra inch of that house, you are not maximizing your investment. I did not buy the house I live in as an investment, I bought it to provide shelter for my family and to use it for my own needs. Its value is not important until I decide to sell it or leverage it. As a real estate professional I do tend to look at the investment side of buying a house even when I intend to live in it, but I never let the investment potential or lack there of, be the overriding factor in the purchase. The primary concern is its use value. Investment potential is supplemental at best."

Home ownership is an important part of our American economic system and both political parties seem to get that. It is one of the few issues in which we have a non-partisan consensus. If you are able the time to act is now.

No comments:

Post a Comment