RALEIGH – The Federal Reserve has taken another strong stance to combat inflation, as many economists expected. But yet another interest rate hike – the third consecutive 75-basis point increase this year, with more expected – just might crash the housing market.
Or at least, that’s the concern.
In the short-term, mortgage rates may continue to rise, said Jon DeHart, branch leader and a mortgage loan officer with Movement Mortgage.
Even before the Federal Reserve formally announced the decision to raise interest rates on the federal funds rate by three-quarters of one percent, or 75-basis points, typical mortgage rates spiked in the last week.
That’s according to the latest data from Freddie Mac, which surveys the primary mortgage market on a weekly basis.
Payments soar – here’s how much
A year ago, when rates were about 2.9%, to purchase a property with a sale price of $425,000, with a down payment of 20%, or $85,000 and a loan amount of $340,000 on a 30-year fixed rate term, a borrower would have expected to pay $1,415 monthly toward the principal and the interest of that loan.
A week ago, a loan of $340,000 on a purchase price of $425,000 under the same conditions would have resulted in a monthly payment of $2,038 per month. That’s a difference of more than $600 monthly.
Before the Federal Reserve moved to raise the federal funds rate, a borrower could have locked in a rate, on average, of 6.3% on a 30-year fixed rate mortgage. Assuming the same down payment, a borrower could expect a monthly payment of $2,105.
DeHart confirmed that mortgage rates as of today may actually be closer to 6.5%, which would yield a payment of just under $2,150 monthly under the same conditions.
That’s $735 more per month than it would have been a year ago, or an increase of nearly 52% year-over-year.
Don’t forget: the median sale price of real estate in the Triangle has increased during that time, as well.
Mortgage rates as of today
According to the latest data, the average mortgage rate as of today for a 30-year fixed rate mortgage is now 6.29%.
That’s up more than one-quarter of one percentage point since the prior week. And rates have more than doubled since the same week one year ago, when rates were 2.88% on an average 30-year fixed rate loan.
This is not good news for would-be homebuyers who may have already been feeling cost-constrained, said DeHart. “Until the market believes that inflation is under control, most experts expect rates to continue to go up,” he said.
For anyone home shopping this weekend, expect rates to have increased beyond the average rate shown in the Freddie Mac data.
“I think 6.5 % is a fair rate to use today,” said DeHart.
Triangle well insulated from housing crash, even if recession occurs
Yet the Triangle is well-insulated from the possibility of a housing market crash, and even if there is an economic recession coming, the Triangle may fare better than other regions, experts say.
“The very strong job market, and influx of companies and workers which will keep housing demand, consumer spending, business investment and hiring stronger than national levels,” said Dr. Gerald Cohen, the chief economist of the Kenan Institute.
And consider this: it’s not like financial institutions, especially large ones that regularly do mortgage origination and lending, were surprised by the three-quarters of one percent increase in the federal funds rate. That’s actually what was most likely, as WRAL TechWire previously reported.
Still, the shock waves sent through the stock market, for example, and a possible ripple effect in the mortgage market was largely based on the change in the forecast. The Federal Reserve is continuing to signal that it could again raise the federal funds rate, including somewhere between 100 basis points to 150 basis points this year and additional rate hikes in 2023, said Cohen.
UNC-Charlotte Economist John Connaughton forecast two additional half-point or 50-basis point interest rate hikes in November and December of this year in a virtual event held on Thursday where he noted that inflation is very much here to stay.
Is there good news for homebuyers?
But most Triangle homebuyers only stay in their homes for five to seven years, said Jim Allen, broker-in-charge and the owner of The Jim Allen Group, which means that buyers could look at adjustable rate mortgages as a possible solution for financing a home purchase.
And while homebuyers may seek to reduce the monthly cost of borrowing money to fund a home purchase, many financial institutions may now be able to lend more money to local borrowers who may not be able to put a 20% down payment on a home purchase, said Allen.
According to Allen, the maximum loan amount that a borrower can qualify for using a down payment of 3% or 3.5% has increased dramatically in recent weeks, moving from a loan amount of $465,000 to a loan amount of $715,000. Allen described that as the biggest increase in the history of the Triangle real estate market in a conversation with WRAL TechWire on Thursday.
“What I believe is going to happen is that you’re going to have less and less to take to the closing table,” said Allen. “That buyers are going to continue to buy.”
After all, noted Allen, the Triangle is anticipating more than 37,000 new jobs coming to the region.
“Local people may not move, but these 37,000 plus new workers aren’t living in this market,” he said.
Fed interest rate increase fallout
Despite the increase in the federal funds rate being expected by investors, banks, and economists, the rise in the rate will cascade to other interest rates, including mortgage purchase loans, refinance loans, and home equity loans as well as home equity lines of credit, said Dr. Michael Walden, an economist and regular contributor to WRAL TechWire.
“Every region in the country will see these effects, although given the strong growth in the Triangle, they will be somewhat less here,” said Walden. “Still, this action – as well as further increases in rates – will increase the chances of a real recession.”
That could mean that we’ll see the federal funds rate move as high as 6%, said Walden, whereas it remains for the time being between 3% and 3.25%.
Editor’s Note: Each Friday, WRAL TechWire takes a deep dive into the Triangle’s real estate markets, including the latest on mortgage rates as of today and the impact of rising interest rates on the Triangle real estate market, the topics of this week’s report.
WRAL TechWire reporter Jason Parker, the author of the report and a licensed real estate agent in North Carolina, works with journalists from WRAL.com to track and present market data and report on how people are experiencing the region’s changing real estate markets. These special reports will use the category tag “Triangle Real Estate” or “Triangle Real Estate Market.”