How rate changes impact buying power?

Yesterday the Federal Reserve increased the Federal funds rate by 0.25%.  This is the first time in nine years that the benchmark rate has been increased.  The idea is to curb inflation before it happens.  But what does this increase mean to home buyers and sellers and the associated mortgage payments that go along with real estate sales?  The Federal funds rate will have an immediate effect on credit cards and home equity lines of credit.  However, the federal funds rate is not directly tied to mortgage interest rates.  So it does not necessarily mean that mortgage rates will immediately rise by 0.25%, but the change will cause them to increase indirectly and in time.

Simply put, if mortgage rates were to rise by 0.25%, for example, from 4.0% to 4.25% here is a breakdown of the net effect on real estate mortgage payments:

– A $250,000 mortgage loan payment would be roughly $36 higher per month.  For a buyer unwilling or unable to accept the higher payment, the result is that the buyer would need to borrow roughly $7000 less than they would at the lower payment or spend about $7000 less.

– At $500,000 the monthly impact is $73/month or spend $15,000 less.

– At $750,000 the monthly impact is $109/month or spend $22,000 less.

While these differences are minor they do exist and if rates continue to rise, then the impact becomes more significant.  In the short term, there will be a greater disconnect between buyers and sellers.  Sellers will not be immediately prepared to sell their home for less money just because rates have dropped.  However, current buyers that have been looking for awhile may not be willing to immediately lower their expectations.  We saw this happen in the summer of 2013 when rates jumped almost a half point in a 30 day period.  The market immediately slowed for several months before picking up momentum again.  Perhaps a slowdown might not appear as evident because of the time of year and hopefully, the spring market will bring new life back into the market if things do slow.

In 2013, the rate change was due to market fluctuations and was temporary.  Rates eventually did come back down so those who waited through that higher rate period were rewarded.  This time it is different as it is unlikely that the Fed will reverse their decision in the immediate future, so rates are likely to stay at the higher rates.  So for buyers, waiting for rates to come back down is probably not a good strategy.

This week we’ll publish the real estate stats for Mecklenburg County Single Family home sales comparing November of this year to the previous month and the previous year.  Since the Fed change only happened yesterday, these numbers will not show any impact.  Any market impact won’t show up in the numbers for another couple of months.

Here’s a summary:

– Home sales are down 18% from last month (seasonally normal), but up 2% from last year.

– Average home price is down 1% from last month, but up 3% from last year.

– Median home price is up 8% from last month and up 9% from last year.

– Average price per square foot is down 2% from last month, but up 6% from last year.

– Pending home sales are down 7% from last month, but up 17% from last year.

– Housing supply is down 8% from last year and down 17% from last year.

– Mortgage rates are up slightly from last month, but down slightly from last year.  (Expect this to change soon.)

– Average monthly housing payment is up 1% from last month and up 2% from last year.



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