There are few things that horrify the American consumer more than yelling, “The Fed is raising interest rates!!!!” People searching for affordable homes see their hopes go up in smoke. Existing home owners see their equity disappear even faster. The cost of everything in the entire world goes up while the money people have to spend goes down. It’s an incredibly grim situation, or at least it would be if these things were all true.
The reality is, the Fed actually doesn’t have control of long term mortgage rates. When the Fed raises interest rates, it’s raising the rate that banks pay each other for overnight loans. This may seem like an odd twist for some people, but it’s a foundational piece of our banking system. When the Fed raises rates, it does not directly affect mortgage rates.
The Fed again recently increased interest rates by 0.75%, and what did the mortgage rate do the next day? It actually went down slightly. Why, you ask? Because the market had already anticipated the jump and priced its offerings accordingly. People did not lose their shirts or half of the equity in their homes. Cost of lending did not jump up and ruin the dream of home ownership.
There is a very real correlation, however, between what the Fed does and mortgage rates. If banks have to pay each other 10% interest on overnight loans, you’re not going to see 3% 30 year fixed rate mortgages, but that is not the situation we’re in right now. Home prices may have leveled off, but the housing supply is nowhere near catching up with demand. The leverage that most homeowners have at this point is that they do not NEED to sell their homes. If they want a certain value at sale, they can wait it out. I know a family right now that is waiting for an offer of 1.2 million on their home, but they’ve already moved and are living happily in their new home. If they do not get the 1.2 million offer, they will keep the house and just rent it until the market recovers. Because there is no pressure pushing them to sell immediately, we won’t see a glut of houses on the market, the prices won’t fall down the elevator shaft, and America’s home equity won’t take a nosedive.
The financial situation is not great, to be sure, but if you’re concerned about the housing market, don’t let your day be ruined when you hear that the Fed is making moves.
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