Bump in Fed interest rate, boon for housing market

Analysts predict strong spring selling season

Created date

May 10th, 2017
The word FED in front of a calculator and a background showing charts marking rate hikes.

With the recent rise in the Federal Reserve’s short-term interest rate, analysts, along with prospective home buyers and sellers, have turned their attention to the housing market. The big question on everyone’s mind has been: What impact will the Fed’s increase have on the spring selling season?

By most indications, the prospects look very good for buyers and sellers.

For months, the Federal Reserve had been hinting that, with the ongoing economic recovery, the time had come to raise interest rates from their eight-year-long record lows. As with everything in finance, investors and analysts reacted as that day neared in mid-March 2017.

“When the Fed first announced that they were raising the short-term interest rates, everyone naturally expected 30-year fixed mortgage rates to go up accordingly,” says Aaron Terrazas, senior economist with the online real estate marketplace Zillow. “Prior to any announcement, the markets were already pricing in some type of expectation; and in that case, people feared a rise that was too rapid.”

But instead, they met with a surprisingly subtle increase of just a quarter-point from 0.5% to 0.75%. As a result, the 30-year fixed mortgage rates saw a slight downward adjustment.

The rate that, in early February, averaged 4.04% fell to 3.95% as of March 27.

“Because the Fed’s statement surrounding the increase was a little softer than the markets had initially projected, the 30-year fixed rates ended up going down,” explains Terrazas. 

Fertile soil for selling, buying

So what does this mean for the spring housing season? Forecasters expect it to be one of the strongest quarters in a long time, in large part due to the fact that both buyers and sellers have good reasons to jump into the market.

Analysts predict existing home sales will reach some 6.5 million units in 2017 alone. And there are numerous factors driving this figure.

First and foremost, the unexpectedly moderate rise in interest rates signals an economy that’s recovering at a reliably gradual pace. Even as the 30-year interest rates go up, the ascent will affect buyers only slightly, preserving the overall spending power that is so crucial to their motivation to shop. 

For instance, for buyers of the median U.S. home, valued at $193,800, a 30-year rate bump from 4% to 4.25% would only increase their monthly mortgage payments by $23.

Limited inventory

Furthermore, Terrazas notes that the inventory is scant at present. Indeed, the sellers are in a position to pick and choose their contracts as more buyers enter the market.

According to Zillow’s surveys, the typical buyer nowadays puts in about two to three offers before actually winning a contract. 

“The reality of the market right now is that there are not nearly enough sellers,” explains Terrazas. “Inventory is very low for the number of buyers that are coming on the scene.

“That said, the sellers who decide to sell right now are in a very strong position. They have buyers who have spending power and a relatively small housing pool to choose from.”