While Wall Street waited today for The Federal Reserve to make a move–or as it turned out to not make a move–on interest rates, the real estate industry also took note. The Fed’s Open Market Committee decided today to keep its target for the federal funds rate at 1 percent.
John Kary, a Realtor for RE/MAX 440 in Skippack, Pa., said he typically tracks the Fed to stay in tune with the market.
“Traditionally, I have always been attentive to the Fed’s moves since it affects my opinion as to how to market a home,” Kary said. “At high (interest) rates, it is a buyers market and at low rates, it is a sellers market.”
Kary said low interest rates have driven up home prices in his area to the point at which home-buying activity has already slowed, and interest rate increases are likely to further stagnate the market.
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“With the raising of rates, homes will be out of reach for the average buyer. Raising the interest rates will stop the real estate market in its tracks,” he said. Higher interest rates could even push the economy into a recession, and interest rates above 7 percent could be particularly hazardous to the real estate market, he added.
Economists for the National Association of Home Builders and the National Association of Realtors expect mortgage interest rates to rise above 6.25 percent by year-end, possibly reaching 6.4 percent. David Seiders, chief economist for the builders’ association, said he expects the federal funds rate to rise from its current level of 1 percent to about 3 percent by 2006, with increases beginning in August. Some analysts have touted the strength of the real estate market as the backbone of the rebounding economy.
While no surprises came at today’s meeting of the Fed’s Open Market Committee, the statement the committee released on pending and possible interest rate activity will be carefully dissected and digested by economic analysts and could trigger a reaction in the real estate market. The Fed announced that the federal funds rate will remain at its current level, set last June. But the Fed also laid the foundation for a possible rate change in the future by dropping language relating to the need for patience in approving rate increases from its statement.
Keith Sorem, a Realtor for MacGregor Realty in Glendale, Calif., said he believes the long-term bond market exerts more influence on mortgage interest rates than any decision by the Fed, and a rise in rates by the Fed would be a sign that the economy was picking up.
“Most (real estate brokers) understand the correlation between the bond market and mortgage rates,” he said.
Sorem said that while mortgage rates have been extraordinarily low, he’d feel better if they were in a more normal range. Higher mortgage interest rates should slow the rate of home price appreciation, particularly in the southern California market, he said. Sorem said he’d like to see interest rates stay under 7 percent this year, then gradually rise to a level of 8 percent to 9 percent.
Home buyers and homeowners may be the group most concerned about rising interest rates in part because so many of them have obtained adjustable-rate mortgages.
“The average buyer is not concerned with the Fed. They are concerned that their rate might go up. Assuming the economy continues this upward cycle, most people will benefit–the ‘rising tide lifts all boats’ theory,” Sorem said.
Christina B. Holmes, a Realtor with Holmes Associates Real Estate in Wildwood, Ga., said any rise in interest rates could slow the demand for home purchases while enhancing the rental market. She said that some buyers have told her they want to acquire a home quickly before mortgage interest rates rise any more.
John Nolan of Nolan Realty in Massachusetts said rising mortgage interest rates are necessary because “too many families are lured into an unsustainable purchase” by low rates.
“Every rate rise will drive more families into bankruptcy,” he predicted.
Nolan said interest rates above 7 percent could be harmful to the real estate market and tracking interest rates should be a part of real estate agents’ fiduciary duties to clients.
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