While the jury is still out on what the Federal Reserve is going to do about the Fed Funds rate increase, there is certainty that it will happen at some point in the near future. The lack of consensus stems from mixed signals coming from various components of the economy and the financial situation abroad. And while the U.S. job market is on solid footing and even wages are showing some signs of upward movement, there are other considerations that the Fed is weighing in their decision on whether to raise rates, namely the lack of inflation, a stronger dollar, the recent stock market precariousness, and general global instability.
How Higher Mortgage Interest Rates Will Impact the Housing Market?
When the Feds decide to raise rates, any increase will be nominal and gradual. The anticipation is that the initial increase will be only 25 basis points (e.g., from 3.75% to 4.00%). This is still about 50 basis points lower than the high reached in the summer of 2013 when the Federal Reserve first announced that it would start fading out of its easy monetary policy.
If rates increase 25 basis points, mortgage rates are still at historical lows and exceptionally favorable for homebuyers. The actual impact on a typical homebuyer will be marginal, but this really depends on the buyer’s budget. According to a new survey conducted online by Harris Poll on behalf of Trulia from September 14 -16, 2015 among 2,031 U.S. adults 18 and older, 69% of Americans who would ever buy a home said $250,000 or less is the maximum price that they would be willing to pay to buy their first or next home.
So for a buyer with household income of $60,000 and 20% down payment, the increase in mortgage rates on a 30-year fixed rate loan from 3.75% to 4.00%, would mean that the maximum amount they could spend on a home would fall from about $308,000 to $301,000 – keeping within the budget of most Americans. The drop is relatively larger for a buyer with household income of $100,000, but their budget is also relatively larger. Long story short, an increase in rates would not turn people off from buying a home, but it may slightly lower the price range in which they are looking to buy. Also, the impact is quite dependent on the price range in which the prospective buyer is looking to buy.
|Maximum Home Price that Median Household Income Can Qualify For|
|Annual Interest Rates||$60,000 Median Household Income||$100,000 Median Household Income|
How Do Americans Feel About Rising Mortgage Rates?
Interestingly, for Americans who are looking to purchase a home this year, mortgage rates are not the primary concern. Among Americans who would ever buy a home, most worried about being able to get a mortgage and if they could find a home that they would like. Raising mortgage rate is only the third concern, followed by fears that home prices would increase before they buy a home. But, for millennials aged 18-34 years old, simply being able to get a mortgage is the biggest and marginally larger concern than for all Americans in general. Millennials also worry more about finding a home they like and home prices rising before they worry about raising mortgage rates.
|If they were to buy a home this year, what consumers worry about:|
|% of Americans||% of American Millennials (age 18-34)|
|I could not find a home for sale that I like||26%||30%|
|I could not get a mortgage||26%||36%|
|Mortgage rates would rise before I buy||24%||26%|
|Home prices would rise before I buy||23%||28%|
|I would have to compete with many other buyers||14%||19%|
|Home prices would fall after I buy||13%||15%|
|I would have to decide on a house very quickly||10%||15%|
Nonetheless, Americans are well aware of the anticipated mortgage rate increase that’s coming up: 42% of Americans think mortgage interest rates will increase over the next six months, while 20% believe the rates will stay the same. A third (32%) of Americans, and almost 4 in 10 (38%) Millennials, are still unsure about what will happen to the mortgage rates, with Millennials are not as likely as other generation to think that rates will increase at all over the next 6 months.
What’s The Straw That Will Break The Camel’s Back?
While most experts do not anticipate mortgage rates to move much beyond 4.5% over the next year, 46% of Americans who would ever buy a home say that rates beyond 5% would discourage them from buying their first or next home. However, 15% say that at 4%, mortgage rates are already too high from them to consider buying a home. Still, 14%, and over a quarter (25%) of Baby Boomers, say the mortgage rate does not concern them because they would buy a home without a mortgage.
|How high would rates have to rise to discourage you from buying your first or next home?|
|At 4%, mortgage rates are already too high for me to consider buying a home||15%|
|8% or higher||10%|
|The mortgage rate does not concern me because I plan to buy a home without a mortgage||14%|
|Note: Only among Americans who would ever buy a home|
So, what can we expect after the Fed’s announcement? Financial markets’ recent rashness may still result in an initial knee-jerk reaction to any changes in the Fed’s policy. Rates could jump up at first, but should quickly reverse back to current levels as the markets take in the change. In fact, economic uncertainty abroad will help keep the mortgage rates low for extended time. The greater concern is what all of this is going to do to consumer confidence. Consumers are sensitive to top line news titles and may perceive the impact on their bottom lines to be greater than they will be.
Most importantly though, if the Federal Reserve decides to raise rates this year, it will be because they are confident that the economy will weather any short-term shocks. Over the longer term, the strong economic fundamentals, including robust job growth, better-paying jobs, rising wages, strong consumer demand, and demographic currents in favor of the housing market will boost demand for homes. Lastly, educating consumers about the mortgage process and what is required from them may be more important for the health of the housing market going forward than anything else.
This survey was conducted online within the United States between September 14th and 16th, 2015 among 2,031 adults (aged 18 and over) by Harris Poll on behalf of Trulia via its Quick Query omnibus product. Figures for age, sex, race/ethnicity, education, region and household income were weighted where necessary to bring them into line with their actual proportions in the population. Propensity score weighting was used to adjust for respondents’ propensity to be online.
All sample surveys and polls, whether or not they use probability sampling, are subject to multiple sources of error which are most often not possible to quantify or estimate, including sampling error, coverage error, error associated with nonresponse, error associated with question wording and response options, and post-survey weighting and adjustments. Therefore, the words “margin of error” are avoided as they are misleading. All that can be calculated are different possible sampling errors with different probabilities for pure, unweighted, random samples with 100% response rates. These are only theoretical because no published polls come close to this ideal.
Respondents for this survey were selected from among those who have agreed to participate in our surveys. The data have been weighted to reflect the composition of the adult population. Because the sample is based on those who agreed to participate in our panel, no estimates of theoretical sampling error can be calculated.
About The Harris Poll
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