RISING RATES CHIP AWAY AT BUYING POWER
Banks give mortgage loans to help people purchase homes- for a fee. The cost of borrowing, known as the interest rate, can make a big difference in how sizable of a mortgage you can afford or whether you get one at all.
The reason banks change interest rates is because at the end of every day they need to have a certain amount of capital in their reserves. As we spend money, that balance fluctuates, so a bank may need to borrow overnight to meet the minimum capital requirement. Just as they charge you for a loan, they charge one another.
The Fed tries to influence that charge — called the federal funds rate — and it’s what the Fed is targeting when it raises or cuts rates. When the fed funds rate rises, banks also hike the rates they charge consumers, so borrowing costs increase across the economy.
Between 2012 and 2016, mortgage rates hovered near historic lows, extending what buyers could afford even as home values recovered from the recession and reached new heights. However, interest rates have shown a marked increase in 2017 and 2018, steadily eating away at that affordability.
Low mortgage rates have kept first-time homeownership and move-up homes affordable for many Americans, even as home values have soared to new heights. While mortgage rates remain low by historical standards, they are creeping upwards, diminishing buyer’s purchasing power, and in higher-priced markets, affordability is already a concern for many buyers.
In the Washington D.C. metro area, the share of income spent on mortgage payments in the 2nd quarter of 2018 was 19.4%, below the historical norm of 22.3% from 1985-2000. Low interest rates have made this possible in the face of rising home prices. After last month’s meeting, the Fed issued a forecast that predicted one more rate increase before year’s end, three more in 2019 and a final one in in 2020.
If you’re on the fence about purchasing, you may want to consider buying before rising interest rates raise the real cost of your dream home. Most of the sales price increases for the year take place in the Spring, when buyers are competing for homes. With simultaneously rising interest rates, it makes sense to have a commitment-free meeting with us to go over your plan and ensure that you are buying at the best possible time. We aim to be of service every step of the way, from providing market advice, to helping you find a home & negotiate the best price, as well as all of the steps along the way to a successful settlement that puts the keys to a new home in your hand.