Loan seekers this past year will have noticed it is becoming more expensive to borrow. And nowhere is a quarter percent rate hike felt more than by buyers in the housing market. Whether rising interest rates actually will have an effect, though, is hard to predict.
Low interest rates have hung around for so long, hardly anyone entering the market today can remember a time when 6 percent seemed like an incredible deal. But it was – and as recently as 2007.
Interest rates began their slide in the mid-90s, after soaring to as high as 18 percent in the 1980s. By 1996, refinancing to 8-9 percent made sense. A 5 to 10 percent drop in a mortgage meant money for college, cars, computers in the age of the fledgling Internet. Then came the 2008 financial meltdown. The Fed spent the next seven years holding interest rates at at an unprecedented 0.25 percent to pull the U.S. economy out of its worst recession since the Great Depression of the 1930s. That move translated to 30-year mortgage rates sliding to an unbelievable 3-4 percent.
Fast forward to 2018. As of today, the Federal Reserve’s funds rate is 1.5 percent. All signals coming out of the Federal Reserve is that it will continue to raise its short-term rate. The reported goal is 3 percent by 2020. The Fed Funds rate is the rate banks charge each other for loans.
The effect has sent mortgage rates north of 4 percent, with some hovering near 5 percent. On the positive side, that is good news for savings accounts. The negative impact of rising interest rates will be felt by buyers seeking loans and credit card users who maintain balances.
Bankrate.com summarized several predictions for 2018 from the largest housing and mortgage groups for the 30-year fixed-rate mortgage:
- The Mortgage Bankers Association predicts it will rise to 4.6 percent in 2018.
- The National Association of Realtors expects it be about 4.5 percent by the end of 2018.
- Realtor.com expects mortgage rates of 4.6 percent now that will reach 5 percent by year-end.
Whether this will have a negative effect on home sales is anyone’s guess. So far, the housing market, particularly in Central Texas, has defied conventional wisdom.
And there are new factors out there. While demand has softened, inventory remains tight, which could temper the need to soften prices in hotter markets.
Millennials have replaced aging Baby Boomer parents as the new mega-generation. Thanks to the recession, they were slow to enter the housing market, but have made up for it since. In fact, the generation of young adults born after 1980 now claim top slot for having the most homeowners who are single. Stock volatility has endeared this post-recession generation to using real estate as an investment portfolio cornerstone. Bank of America also found in its latest survey that despite a high student loan debt load, 16 percent of millennials reported having savings of $100,000 or more. This is double the amount of young people who had socked away that much in 2015. That means they have the 20 to 25 percent required down payment for investment properties.
So, as we head into spring, the traditional ramp-up of the housing season, one thing everyone can agree upon. Hold on to your hats, 2018 could be another wild ride.
Debbie Stevenson is a broker associate with JB Goodwin REALTORS. She spent 25 years in journalism before becoming a licensed Texas REALTOR.