Yesterday saw a media frenzy over the Federal rate hike on interest rates. Who cares? You might wonder. I totally get it. This is NOT the most riveting of subjects. I mean, in the grander scheme of things, it’s just government playing around with the economy, and on a day-to-day basis that doesn’t overtly impact most of our lives, so why get too concerned?
Because it’ll affect my monthly budget (that part gets my attention, at least!).
If you’re planning on either buying or selling a house in the next couple of years, a change in the Fed interest rates–essentially, that’s the short-term rate at which the government loans lending institutions so that they have money on hand to lend to you–might affect how much you buy a house for, or how much you can sell it for.
One of the biggest questions we get asked by military families who are in the PCS process is whether it’s a good time to buy. The answer isn’t a simple yes or no (though that would be nice!). There are too many factors involved in the answer to that question from your particular personal financial situation to the hyperlocal neighborhood economy of your move to geopolitics and the national economy. As Steve Chester with Bank of Texas, one of the lenders with whom many of MilHousing Network’s clients have worked with on VA Home Loans, shared with us, “Mortgage rates are driven by mortgage backed securities and what happens with treasury bills.”
In the case of the Fed rate hike yesterday, this now means that your purchasing power is likely affected for two key reasons:
Your interest rate on your mortgage will likely be higher.
- The banks are borrowing money at a higher rate, so they’re lending at a higher rate, too. As of last night, a large number of the big banks (Wells Fargo, SunTrust, JP Morgan, Citibank, Bank of America & etc.) had already increased Prime rates (best rates) from 4.25% to 4.5%.
- Your interest rate on any unsecured loans, such as a credit card, will likely increase, too.
If your interest rate increases, your monthly payment amount will increase, which in turn will increase your debt-to-income ratio, and will subsequently reduce the amount you are able to borrow.
Long story short – in the short-term, this could mean that it’ll cost you more money to get that house you’ve got your eye on for this duty station.
…or the price of the house may reduce to compensate for buyers at the same price point at which you’re shopping who are dealing with the Exact. Same. Problem. They’re not happy with higher interest rates affecting their planned home shopping budget either! This is called a market correction. “Ultimately,” Chester explained, “the economy can only handle so much increase before home purchases are slowed or stalled.”
The market correcting entirely depends on the condition of the hyperlocal market in which you’re shopping. Nationally, we are in a seller’s market, which means that there are more buyers than home sellers (story for another day), but in some markets, there are more houses on the market (“inventory”) than there are people to buy them. You’ll need to consult with a good realtor in your local market to make sure you understand the market conditions (if you need a realtor, pop me a message and I’ll get you connected with someone who can address these questions for you).
What?! Why is this so complicated?!
I know! It’s super frustrating. Balancing an economy just ain’t easy, and I don’t envy their job. The Fed looks at a multitude of factors to include inflation (which has not been meeting their target goal of 2%) and unemployment (low). We’re in a weird economic situation where we have a strong housing market, low unemployment, high consumer confidence (people are happy to spend their money), but also low inflation and stagnating wages. We’ve not encountered this situation previously, so it’s difficult to tell what will happen.
What we do know is that the Fed plans to raise the rates again this year. And again. And again. And then in 2019, they’ll do it a couple more times. They’ve been warning us this would happen.
For those who are relatively new to the housing market, our current interest rates are insanely low–even at 4.5%. In my humble opinion, it’ll take a couple rate hikes before we see significant impact to the market, though I’m neither an oracle nor an economist, just a nerdy student of socioeconomic trends in history.
Chester has a good bit more experience when it comes to riding the waves of shifting economies and recessions. When I chatted with him about the impact he believes the Fed rate hikes will have on military families, he shared the opinion that a couple of rate hikes won’t have a significant impact on home buying. “Things that dramatically affect mortgage rates,” he explained, “are typically geopolitical events, for example, a terrorist attack, a war, a country going bankrupt (like Greece) or something like Brexit. Most commonly, a significant cost in energy like oil prices jumping dramatically, would ultimately have a direct correlation on home loan rates increasing.”
So for a military family looking to buy a home, what does all this mean for your budget?
If you’re shopping for a $225,000 home (an average home price) in Chester’s market of San Antonio, you would expect to spend roughly $1,564.41 (including taxes) each month when using a zero down, 30-year VA Home Loan, at 4.25% interest. The additional .25% rate that we saw in the past 24 hours would now bring your payment up to $1,664.55–an additional $100.14. More rate hikes will mean even higher monthly payments.
Chester shares that he doesn’t believe that rates will be “sustained at much higher than 4.5-4.75% without experiencing some market correction.” If rates do continue to increase, though, then rental rates will likely have a correlating increase, and ultimately BAH rates should follow suit with subsequent increases, too.
If you want to know how this rate increase will affect you, send us a message, and we’d be happy to connect you with Chester. He said that he’d be happy to talk numbers with any military family concerned about how your monthly budget may be affected by this news.