Nowadays the market has become tough for homebuyers as the prices are high and the supply of available homes is low. Furthermore, if you are sitting on the fence that means you are losing your purchasing power right now RAPIDLY.
The Federal Reserve’s Rate Hike is making it expensive to buy homes. The benchmark interest rate was increased by the FED by one-quarter of a percentage point recently.
The FED Rate Hike took place on Wednesday making the target federal funds rate by 25 basis points to a range of 0.75% to 1.0%. Though the FED does not set the mortgage rates directly, its actions impact the housing market. Since the end of 2015, the rates have been raised three times by FED. The first hike surfaced in December 2015, the mortgage rates started with a drop in the initial few week in year 2016.
A 30-year fixed rate has increased on average from 3.590% to 4.30+%. As a result of this a buyer who was capable of a $1M home on Friday lost about $40k from their purchasing power. Now, they qualify for $960k purchase price.
The mortgage rates move with the government’s 10-year Treasury note that acts as the benchmark for various forms of credit as well as mortgages. Since Donald Trump was elected president, the interest rates on the notes have risen already and will continue to do so when the FED tightens the monetary policy.
The hike seen on Wednesday was expected. The market priced it already so most of the experts do not foresee rates going higher in the upcoming weeks. The markets believe that the election of President Trump is boosting the economy. A better economy brings higher mortgage rates and a struggling economy brings lower rates. The FED rate hike is being seen as something as a vote of confidence in the US economy that has witnessed job growth and increasing inflation.
A year ago, the average rate of a 30-year fixed mortgage was 3.68% which climbed to 4.21+% last week. Buyers will be paying around $57 more each month at the current interest rate compared to previous year if the price tag is assumed to be $235,000 with 20% down payment. For a majority of buyers, this might be a deal breaker and could certainly hurt those who are looking for home in more expensive localities or those who are just on the margin of affording a home. This will come as a shock for those looking forward to home-shopping this spring season.
The Central bank is expected to increase the rates three times this year. If the bank’s actions become more aggressive a sharper raise in mortgage rates can be expected. The global economic scenario is doing fine at the moment and things look good. Markets are not only reacting to action of the FED but prospects in rest of the world as well.