When it comes to the Federal Reserve and interest-rate hikes, it has become a question of will they or won’t they. All eyes are on the policy makers as they continue to hedge whether interest rates will increase this year.
Just this past month, the Fed delayed increasing rates yet again — good news for the real estate market, but concerns still linger. An interest-rate increase is seemingly inevitable, but what could a rate hike mean for the housing industry?
The story since ’08
The real estate market has enjoyed historically low rates since 2008, when the Fed drastically cut interest rates to help the market recover from the housing crisis. Since then, home prices and sales have increased steadily, and buyers have become accustomed to low rates and relative affordability.
Many real estate agents are concerned that increased rates will mean on-the-cusp buyers might be priced out of the market or that housing gains will stall. When rates do increase, there’s little doubt that the impact on the housing market will be significant.
Small rate hike still means bump in DTI
Even a relatively small interest rate increase of 50 basis points could have serious consequences for the housing market, according to realtor.com chief economist Jonathan Smoke.
According to his analysis, a 50-basis-point hike could mean a 6 percent increase in monthly payments for new mortgages. This could spell trouble for potential homebuyers who then will be facing increased debt-to-income ratios (DTI).
Smoke’s analysis indicated that the average DTI would increase by 4 percent, which could lead to as much as a 7 percent increase in rejections of mortgage applications. The increased monthly debt burden could mean that potential homebuyers have to look in a different price tier or they might not qualify for a loan altogether.
Sales prices could decrease
These increases, however, could be offset by lowering sales prices. Increased interest rates likely will put pressure on the housing market, and sales prices might decrease, especially in the first wave of interest-rate increases.
With lower prices come lower down payments, which could open the door for some potential homebuyers. However, this impact will vary by market.
High-cost housing markets where jumbo loans are popular likely will see more buyers priced out of the market as first-time or lower-income buyers no longer meet qualification guidelines.
Expand business to work with new borrowers
In the first half of this year, conventional loans made up 50 percent of the market; Federal Housing Administration (FHA) loans made up 31 percent; and Department of Veterans Affairs (VA) loans made up 12 percent.
If interest rates increase, conventional and jumbo loans are more likely to hit the upper limits on DTI, while FHA and VA loans are less likely to hit the upper limits. This could signal a significant boost for FHA and VA loans as some buyers no longer qualify for conventional loans.
For FHA borrowers, though higher interest rates mean a higher monthly payment, a lowering of home pricing might help offset the increased rate with an additional lower amount down. Savvy real estate agents will want to position their business accordingly if interest rates increase as expected.
Agents who do a large amount of business with jumbo or conventional borrowers might want to consider expanding their business to work with FHA and VA borrowers or lenders that offer credit to underserved borrowers with lower credit scores and lower down payments.
By partnering with lenders who work with underserved borrowers, real estate agents can tap into the market of potential homebuyers who might think that increased interest rates cut them out of the housing market entirely.
Agents who are looking to work in this market for the first time should aim to partner with lenders that are experienced with FHA, VA and Department of Agriculture (USDA) loans. They should also seek out lenders that offer lower minimum credit scores, lower down payment requirements, and extended eligibility to more property types.
Agents who are versed in what a rate hike could mean — and how it will affect potential buyers’ ability to qualify for a mortgage — will be able to better withstand any market fluctuations caused by a change in the Fed’s rate policy.
Ray Brousseau serves as executive vice president for Carrington Mortgage Services Mortgage Lending Division. Please follow Carrington on Twitter or LinkedIn.
