When the week started, investors were pretty confident that the Federal Reserve was preparing to raise its benchmark Federal Funds rate as soon as next month. That was on the heels of a promising jobs report for July. But what a difference a few days makes.
The timing of that rate hike is now in question after China devalued its currency this week in an attempt to boost its slumping economy. The move could weaken U.S. exports and economic growth, and it could rattle the Fed’s confidence in the strength of the economy. The Fed has kept borrowing costs at 0% since December of 2008.
Aside from the yuan devaluation, it remains a question of “when” not “if” a rate hike is coming. Much has been made about the timing of such a move by the Fed because all kinds of borrowing costs will go up as a result.
But how much does that initial move matter to a consumer, specifically a prospective home buyer? Mortgage rates already inched up this week after three straight weeks of declines, according to Freddie Mac. What can home buyers expect? We asked Trulia’s chief economist Selma Hepp.
DOES THE TIMING OF A RATE HIKE MATTER FOR THOSE LOOKING TO BUY A HOME?
It’s not so much the timing but the pacing, says Hepp. “The looming Fed rate hike is important because it impacts borrowing costs across the entire financial system,” she says, “which means it essentially increases costs of borrowing for mortgages.” Whatever the central bank decides to do, Hepp thinks it is going to do it “very, very gradually” and “the impact on home buyers is going to be really small.”
WILL A RATE HIKE HAVE AN EFFECT ON HOME SALES? WHAT ABOUT HOME PRICES?
Perhaps, but more so home buyer activity than prices, says Hepp. That's because higher mortgage rates could be a game changer for some home buyers because monthly mortgage payments would go up.
Higher rates, for example, could push a first-time home buyer to purchase a different or less expensive home, or delay buying to come up with a larger down payment. Climbing rates could also lead a buyer to choose a different type of mortgage with a lower interest rate or exit the housing market altogether. That change in buyer activity could then affect home prices negatively; People who already own a home may not be able to sell their starter homes, which could affect their ability to turnaround and buy a larger home and eventually that would push home prices lower.
But, Hepp cautions, all of that is more likely to happen if rates were to rise suddenly and drastically, and that isn't going to be the case. “The increase is going to be very minimal and gradual and the impact on the home buyer activity should not be significant,” she says.
BUT MORTGAGE RATES WILL GO UP, EVEN SLIGHTLY, AFTER A RATE HIKE. SHOULD A PROSPECTIVE HOME BUYER TRY TO BUY BEFORE?
Rates will tick up, says Hepp, but don’t over think it. “If a prospective home buyer is ready, the increase in interest rates is not going to impact them as much,” she says. “It is more a question of their preparedness vs. how much the rates [are] and when they change.”
Hepp says a "prepared home buyer" is someone who is ready to stay in a home for at least 5 to 7 years, has a good, steady job, knows that he or she is going to be able to pay the mortgage and has enough savings for a down payment.