Interest rates are affected by the bond market, the actions of the U.S. Federal Reserve, and the health of our nation’s economy. Many people are understandably concerned about how an increase in the federal funds rate by the Federal Reserve will impact mortgage interest rates and the Miami real estate market. As a Miami real estate agent for the past 15 years (and previously as a financial advisor), I closely monitor the economy, the federal funds rate and mortgage interest rates. I firmly believe an increase in the federal funds rate will have little direct impact on our real estate market.
Mortgage rates are independent of the fed funds rate and, therefore, are not determined by the Federal Reserve. Mortgage rates are determined by many factors, the most significant of which is the yield on the 10-year Treasury note. Therefore, even if the Federal Reserve increases the fed funds rate, this does not necessarily mean there will be a corresponding increase in the yield on the 10-year Treasury note. Even if the yield on the 10-year Treasury note increases in response to a modest increase in the fed funds rate, mortgage rates are still at such historic lows that buyers of properties would still benefit from historically low rates compared to historic norms.
Over the past decade, everyone — consumers, real estate professionals, mortgage brokers, buyers, and sellers — have been completely spoiled by some of the lowest mortgage and interest rates in history. This is not an exaggeration — the average interest rate has been 5.18 percent since the start of our nation’s history. In October 1981, mortgage rates were higher than 18 percent! Many economists believe that today’s rates have formed a “floor,” and that a reversal (some might say a “correction”) is in order.
“The U.S. economy has already adjusted to the impending rate hike over the last six months,” says Ray Duran, mortgage broker and bank manager at Quontic Bank. What will be affected most, according to Duran, are short-term loans and lines of credit — not mortgage rates.
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▪ Home prices in the rising interest rate market: While Miami’s housing inventory stays quite low, demand remains high, and sellers in today’s market have been able to demand top dollar. It is common to believe that, if mortgage rates rise, home prices would fall accordingly — but this is not necessarily the case.
In fact, there is a strong direct relationship between home prices and interest rates. Higher interest rates may negatively impact home sales, but prices of homes move according to supply and demand. Home prices are rising twice as fast as wages, and, as I mentioned, tight supply is driving up home prices.
▪ Dollar and sense: Many of us, it seems, have an almost pathological resistance to rising interest rates, and our anxiety is disproportionally bigger than their actual impact. Case in point: I recently represented a buyer on a purchase in Miami Beach. The client had received a preliminary “lock rate” months earlier, but due to personal matters, they did not follow the deadlines and were late to deliver their documents to the mortgage broker. As a result, they were locked into the purchase at a rate increase of 50 basis points higher than what they expected, but risked losing their escrow money if they walked away from the closing table.
Fifty basis points! 50! Five-zero! That certainly sounds like a major jump, doesn’t it? You might consider backing out of a deal over that kind of dramatic increase too, right? But here’s what you should realize, and what I explained to my client: The “new” rate resulted in an increase of only $10 to $15 on his monthly mortgage. Not so bad, right? (My client certainly thought so, and wisely closed the deal.)
So, let’s get past the shock value of rising basis points and talk actual dollars and cents. As of Friday, the mortgage rate is 4.375 percent on a 30-year fixed rate. The monthly cost of a $300,000 loan would be $1,497.86. If the Fed raises the rate by 25 basis points, the monthly cost would increase $45.46 to $1,543.32. An increase of the rate by 50 basis points would increase the cost by $90.68 to $1,588.54. Again, think about what you might do in this situation — would a difference of $45 a month, or even $90 a month, impact your decision to buy (or not buy) a particular home?
▪ A matter of time: Again — rates are almost certain to increase; the question is when the Federal Reserve plans to bring them to a realistic level. Many economists predict this decision might happen in December. It will certainly make for an interesting holiday season should this come to pass, but I say again: Don’t fear, but embrace the inevitable rate hike, and the healthy long-term results it will deliver to our market and economy.
Jeffrey Margolis is a broker/Realtor with Re/MAX Advance Realty. He can be reached at Jeff@jeffmargolis.com
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