By Erik J. Martin
CTW Features
For only the second time since 2006, the Federal Reserve raised its key interest rate by a quarter percentage point last December and also forecast three possible further rate increases in 2017 – likely causing many to rethink their New Year’s resolutions to buy, sell, or refinance sooner rather than later.
While a Fed rate hike isn’t the only factor that can cause mortgage interest rates to correspondingly rise and, consequently, loan applicants to lose interest, it can play a significant part. Sure enough, mortgage rates inched up in the wake of this news, and mortgage application volume and refinance application volume dropped 12 percent and 22 percent, respectively, from mid-December to early January, according to the Mortgage Bankers Association.
Which begs the question: how worried should folks be about rising rates and the real estate market in 2017?
Ask Carolyn Riegler, real estate broker/CPA for O’Keefe LLC, a financial consulting firm in Bloomfield Hills, Mich., and she’ll tell you to take a deep breath and relax – even with rates on the benchmark 30-year fixed-rate mortgage now well above 4 percent.
“Rates are still near historic unimaginable lows, and even with slight mortgage rate increases, homeownership is still an attainable American dream,” says Riegler, who recalls average mortgage rates in the double digits in the 1980s – a time when she personally paid 16 percent interest on her first home mortgage. “I expect any mortgage rate increases in 2017 to be very manageable by the average consumer, who will also be reaping the benefits of a stronger labor market and wage growth.”
Eugene Gamble, an internationally renowned real estate and financial investor based in London, agrees.
“Credit is still cheap today, relative to historic rates, so acquiring a home loan in 2017 still makes sense,” he says. “With confidence in further economic growth, a strong U.S. dollar, and the influx of money flowing into the country, 2017 should be considered a very favorable year for getting a home loan or refinancing.”
Nevertheless, it’s important to understand why and how rising interest rates affect the entire real estate market and can give buyers, sellers, and owners the jitters.
“A Fed rate rise makes buying a home more expensive as lending institutions in turn increase their own rates. This means that the pool of potential homebuyers able to afford a loan now shrinks, which makes it harder to sell a home,” Gamble says. “Sellers may even need to reduce asking prices to make their homes more appealing and affordable to potential buyers. And if sellers are dropping asking process to make a sale, that makes homes worth less, which can cause lenders to loan smaller sums to those looking to release equity from their property.”
Rate hikes like the minor ones expected in 2017 may motivate prospective buyers and sellers to get off the fence and act sooner, before rates creep further northward. They also can separate the pretenders from the contenders.
“Rate increases reduce the number of non-serious buyers from the game, causing us to see fewer of the ‘just-looking’ home hunters,” says Ryan Critch, owner/broker with Ft. Lauderdale-headquartered Ocean400 International Realty.
© CTW Features