Rate Increase Won’t Rock the Housing Boat

We’ve all heard it – the US Federal Reserve will be hiking up interest rates very soon. But how will this affect the ever so fragile housing market? Not to worry, the rate increase isn’t expected to cause a crash.

As of late, the housing recovery has been pushed along by low interest rates, steady job growth and improving household finances. The year’s strong first half, despite a few weak months recently, shows that the housing market is ready to withstand the looming rate increase.

The National Association of Realtors’ report on pending home sales shows a positive trend. Pending home sales are a key tool in measuring buying momentum, measuring purchases of previously owned homes based on signed contracts, making it a leading indicator for the broader housing market. These sales hit a nine-year high in May and, although they have slipped the past few months, economists expect a 1.5% increase in October from a month earlier – the year-over-year trend remains positive.

However, there are still fears of what happened mid- 2013, following the so-called taper tantrum. Back then, interest rates spiked and home sales slumped as the Fed indicated it could start to cut back on monetary stimulus. The average interest rate for a 30-year fixed-rate mortgage jumped over a percentage point from April through August in 2013. Pending home sales peaked that June before falling 12% by the year’s end.

While the taper tantrum caught markets by surprise back then, today, there is little shock value in the expected rate increase. Housing conditions remain favorable ahead of the Fed’s big move, with the loosening of credit conditions helping the market. Fannie Mae and Freddie Mac cut down-payment standards late last year and the Federal Housing Administration reduced the premium it charges for insuring mortgages earlier this year.

Higher rates are coming, but don’t expect them to take an immediate toll on housing.

What do you think will happen in the market after the rate increase? Do you think the current market is healthy enough to withstand the hike?

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  • RE_Insider

    One of readers commented via email: That’s what you think. A fed funds rate increase will be devastating to the stock market & housing market.