- people on the move
Ready for a rate hike?
While interest rate increases may be on the horizon, they’re not expected to rock the housing boat too significantly.
In its October 2015 Economic and Mortgage Finance Commentary, the Washington, D.C.-based Mortgage Bankers Association indicated it anticipates nearly $905 billion in purchase mortgage originations in 2016, which is a 10 percent increase from 2015, and refinance originations to decrease by nearly 33 percent to $415 billion due to the likelihood of rising rates.
Dan Grzywacz, senior vice president at Mortgage One in Kentwood and past president of the Michigan Mortgage Lender Association, said while there is a difference between national and local trends, the Grand Rapids area market has had a very good real estate year.
“There are buyers wanting to buy and sellers wanting to sell, so those are two good factors,” said Grzywacz. “The percent of sales are up versus last year. In fact, percent of sales are up 21 percent year to date over last year, and that is a pretty healthy number.”
The U.S. Department of Housing and Urban Development’s Midwest Regional Report for the second quarter 2015 indicated home sales and sales prices increased in every state in the region compared to the prior year, and the “impact of the foreclosure crisis on sales housing markets in the region is also abating.”
In Michigan, nearly 125,100 homes were sold during 12 months ending in June, which is a 2 percent increase from the prior year period when 123,000 homes were sold. The average price of the homes also rose, from $128,200 in 2014 to $137,900 in 2015, an 8 percent increase.
Grzywacz indicated there are a number of factors contributing to the state of the market in the region, such as perception of an improving economy, particularly in West Michigan, low interest rates, declining unemployment and recovering home values.
“People are feeling good about the economy,” said Grzywacz. “In the Grand Rapids market, total business is up 21 percent over last year, as I mentioned, and the average home values are up 5.3 percent year to date over last year.”
While the MBA net mortgage originations projection for 2016 is a decrease to $1.32 trillion from the $1.45 trillion in 2015 due to the anticipated decrease in refinancing, the association indicated “home purchase originations will increase in 2016 as the U.S. housing market continues on its path toward more typical levels of turnover.”
The forecast is based on “strong household formation, improving wages and a more liquid housing market,” according to the report.
The MBA also expects the U.S. Federal Reserve to begin to slowly increase short-term rates by the end of 2015. Grzywacz said to some degree the market already has anticipated the potential rate hike.
“Based on what I see, it is likely the Feds will raise interest rates. We have had some good job reports that have driven interest rates recently,” said Grzywacz. “Interest rates are about a quarter percent higher than they were a month ago, and even if we see a rate hike in today’s environment, interest rates are so low that if you have a quarter to a half percent interest rate hike, it is really not going to be noticed too much by the market.”
Paul Isely, professor and chair of the economics department at the Seidman College of Business at Grand Valley State University, said when the Federal Reserve changes the interest rate, it tends to affect very short-term items and the effect is likely to be very small.
“We have had several months to prepare for the fact that interest rates are going to go up. People thought they were going to go up in September,” said Isely. “The question is, what starts to happen to long-term rates, and the Federal Reserve has already been doing lots of things to try and firm up long-term interest rates, whether that is their purpose or not.”
Isely indicated the Federal Reserve has been decreasing its holding of assets to have long maturity rates, but with the level of demand for long-term debt, the move by the Federal Reserve “isn’t going to change the dial much.”
“What it does do, or has the potential to do in December, is it gives the ability to signal that the Federal Reserve thinks the economy is strong,” said Isely. “The rest of the world knows it is strong — it is the reason why they are buying our long-term debt.”
In terms of the housing market and mortgage lending, Isely said for the bottom half of the market already struggling with issues like short supply, high rental rates and an income growth not keeping up with housing prices, a small change can have a big impact on monthly payments.
“We already have a lot of people priced out of the market for whatever reasons,” said Isely. “The good news is, I think the effect is going to be relatively small. It will affect housing but probably is not going to be catastrophic in any way or form. It is going to change what people are looking at.”
While an increase in rates may impact consumer choice on the type of house or the amount they can qualify for if they are already pushing their limits, Grzywacz said the average homeowner probably won’t even notice the interest rate hike since there are other factors involved, such as the home value and ownership factor.
“It’s about 16 percent of the thought process, the current interest rate,” said Grzywacz. “I think the Feds are going to take a very cautious approach to raising interest rates. I think they feel they are due to raise them, and we are at a place in the economy where they could be raised. Any increase that we see is going to be relatively small.”
Although a rise in interest rates may have an effect of slowing down a few things, such as housing, Isely said the increase is needed to combat wage inflation, which may already be “built into the system at this point” creating a “very insidious inflation.”
“It cooks its way all the way through the system and really starts to bite. It is very hard to roll back,” said Isely.