U.S. Federal Reserve Chairman Janet Yellen listens to a reporter's question during a news conference to announce raised interest rates in Washington December 16, 2015. REUTERS/Jonathan Ernst JONATHAN ERNST
The two-story bungalow you have your eyes on in North Park will not drastically rise in price, or be more difficult to get a mortgage for, because of the latest moves by the Federal Reserve.
Last week, the Fed increased a key rate by a quarter-percentage point that has played a part in keeping mortgage rates low.
But that doesn’t mean the average rate on a 30-year fixed mortgage will be a quarter point higher.
Mortgage rates follow the yields on mortgage-backed securities. These bonds track the yield on the U.S. 10-year Treasury. The bond market is still sorting itself out and yields could end up higher but no one knows by how much or when.
For instance, the day after the Fed raised interest rates, yields on Treasurys dropped as a surge of investors bought up notes.
Most experts agree that any changes to mortgage rates will take a long time to trickle down into San Diego County’s market because of extremely high demand and low inventory — even with more Fed hikes anticipated next year.
Bottom line: Home prices will keep going up but just not as fast as they are now.
Matthew Gardner, chief economist at Windermere Real Estate, predicts rates on 30-year fixed mortgages will rise to 4.6 percent by the end of 2016, up from 3.97 percent now.
That means the monthly payment for that 30-year fixed mortgage (assuming you put 20 percent down) for the county’s median home cost, $418,100, will go from around $1,989 a month to $2,234.
“Is that higher than it is right now? Absolutely. Is it going to be doom, gloom and despondency? Absolutely not,” Gardner said.
He said the psychological impact could be harder to track because consumers have gotten used to interest rates below 4 percent in the past few years.
Zillow chief economist Svenja Gudell said last week that rate hikes could be a good thing in San Diego where home prices have increased8.9 percent in the last 12 months.
“I wouldn't be surprised if, overall, we start to see more of a cool down,” Gudell said, “that I think is actually a good thing for a lot of these coastal markets.”
Housing is still hard to come by in San Diego County. Roughly 7,000 homes were for sale in November, about 1,000 less than average for the last five years.
Rising interest rates make it more expensive to borrow and can limit the amount of money a prospective homeowner needs for a purchase.
Also, the cost of other things, like credit card and car loans payments goes up for people trying to save money for a down payment.
“For every 1 percent increase in interest rates, that decreases people’s purchasing power by about 10 percent” Gardner said. “To borrow $500,000 today, say interest rates go up by 1 percent, you can afford to borrow $450,000. We can’t just keep borrowing the same amount.”
Rich Toscano, the author of the San Diego real estate blog Professor Piggington’s Econo-Almanac, said interest rates are low enough that it can be difficult to predict what will happen.
“From a housing perspective, that is the kind of noise people should really ignore,” he said. “I think they are better served focusing on valuations. How much are you paying for what you’re getting? Why are the valuations the way they are? And ignoring that short-term noise.”
Andrew Ratner, senior vice president of wealth management at UBS Financial Services, expects the Fed to raise interest rates a quarter-percentage point four more times next year and another four in 2017.
“It’s a historic anomaly to have interest rates at 0 percent,” he said. “They did everything but send up the flares that they really wanted to get back to normalization.”
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