Interest Rates...What to Expect
With the economic recovery in full swing, there has been a lot of talk lately about interest rates and the possibility that an increase could be coming in the near future.
This is a classic good news/bad news scenario: On the one hand, people are going back to work and companies are hiring again. On the other hand, the falling unemployment rate could trigger a spike in the costs of lending and make it tougher for many folks to buy real estate.
Because the Federal Reserve has an indirect impact on mortgage rates, a lot of real estate brokers and professionals tied to the industry are watching the Fed's every move this year. As the central bank of the world's largest economy, it has a huge responsibility to stabilize the economy and control inflation.
Real estate is at the heart of all this, along with national employment, GDP, the stock market and other economic indicators.
If unemployment falls enough - perhaps another full percentage point down to the neighborhood of 6.5 percent - that could trigger an increase in interest rates, which will spill into the secondary mortgage markets and eventually to the homebuyers who need the loan. With that cheap credit no longer available, home values in some areas might drop again.
Stephen Phillips, president of the new Berkshire Hathaway HomeServices brokerage network, says he doesn't anticipate the rates to go up any time soon, but when they do, he adds, it won't affect everyone - or everywhere - the same way.
"The rate's rise would be unevenly distributed across the market," says Phillips, who has maintained his role as COO of HSF Affiliates LLC since launching the new brand for Berkshire Hathaway earlier this year.
According to Phillips, many first-time homebuyers could feel the sting of a rising mortgage interest trend as they try to get their first loans. There are many programs to help such buyers with financing, but Phillips notes that some just won't have the flexibility within their budget and/or credit score to stretch for a mortgage requiring higher interest payments.
"The effect would be relatively strong with them," Phillips explains.
But higher rates wouldn't necessarily spell doom for the lower end of the American housing market. Phillips notes that there has been a flood of buyers within this segment taking advantage of the low prices, which resulted from the Great Recession and subsequent Not-So-Great Recovery. These buyers, he says, aren't typically lower-end buyers who are stretching themselves. They're middle- to upper-middle class investors who are snapping up homes to turn them into investment properties and take advantage of the red-hot rental markets. Even with higher interest rates, Phillips suspects this trend could continue and sustain struggling communities.
"It's almost what I'd call a fragmented market. The areas that got hit worst by sub-prime (lending), they've come roaring back at the lower end," he says, pointing to speculative markets in areas such as Florida and Southern California.
On the other end of the spectrum, affluent buyers are usually completely different animals.
The typical high-end buyer, brokers say, will likely do well in a high-rate environment because so many of them don't need mortgages to make a deal. They just need cash.
June Slusser, president of Coldwell Banker High Country Realty, a high-end market in the Blue Ridge Mountains, 100 miles north of Atlanta, Ga., says the prices in her territory are likely more secure than in other areas because a large portion of the deals are all cash.
Without the dependency on a buyer having to secure a mortgage, the question of interest rates is entirely out of the question. But even in High Country, some borrowing might be required for the purchase of a second home.
"Right now, a significant percentage of our transactions are cash," Slusser reports. "The interest rates have not negatively impacted us in anyway whatsoever, but we believe that eventually they will."
Over the past year, Slusser says there has been some bump in mortgage interest rates for deals in her market, but that hasn't been much of a deterrence for borrowers. Rates are still near historic lows, and prices have only recently started to come back.
With the economy on life support, many think that now would be an awful time for the government to increase rates.
Perhaps the most vulnerable segment to such a move is the so-called "jumbo-buyer." These are the folks who were leveraging everything to the hills during the housing bubble of the mid-2000s to buy McMansions.
According to Phillips, this segment will probably be hurt the worst when mortgage rates go up. Though they largely disappeared from the real estate scene after the market crashed, he believes they'd become virtually nonexistent once rates go up.
But it might take a while for these scenarios to play out. Federal Reserve commissioners have been split on their comments regarding when to begin cutting all of their economic stimulus. Many are speculating that policies could start to "taper" in September, but that would likely be a mild beginning to a long and gradual process - one real estate professionals hope won't shock the system or set back the housing recovery.
"I don't believe that rates are going to increase very much, and not for a long time," says Phillips. "When you look at the Fed, they have a dual mandate - employment and inflation. Inflation is persistently below the (dangerous) range and unemployment is still above the target. And GDP growth is still about half the long-term trend potential. Why would the Fed do anything that would significantly increase rates at the moment?"
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