Will the Federal Reserve derail the housing recovery?
Twenty-five basis points. That’s not a very big number. It’s only one-quarter of 1 percent. It may prove, however, to
be the proverbial straw that breaks the camel’s back when it comes to the housing market.
When the Federal Reserve announced its decision to raise the federal funds rate by 25 basis points at its meeting
this past June, the markets reacted with a collective yawn. An increase had been widely expected, and 25 basis
points was what most forecasters anticipated. Even with the increase, the fed funds rate was still at the low end of
historic rates, hovering between 1 percent and 1.25 percent. In a vacuum, this wouldn’t be the sort of thing one
might worry about.
The U.S. housing market, however,
doesn’t operate in a vacuum. There
may well be storm clouds gathering
on the horizon that threaten to put
an end to the slow, choppy recovery the housing market has experienced over the past few years, as
it has worked its way back from the
carnage of the Great Recession.
A recent report by the Joint Center
for Housing Studies of Harvard
University shows home prices rose
5. 6 per cent in 2016, and finally surpassed the previous high set during
the housing boom a decade earlier.
This recovery came at a cost, however: The report points out that
55 percent of renters across the
country’s metro areas can’t afford
the payments on a median-priced
home in their market area.
Driven by the lack of both existing- and new-home inventory available for purchase, home prices have continued
to increase throughout the first half of 2017. According to the Black Knight April 2017 Mortgage Monitor, this past
March represented 59 consecutive months of annual home-price appreciation.
Similarly, Ten-X Research in its Summer 2017 Quarterly Residential Market Report, notes that existing-home prices
have risen 6.2 percent on a year-over-year basis and, based on the average of four major market indexes, home
prices are up more than 40 percent from their low point during the housing-market bust.
The Ten-X report also notes that median monthly mortgage payments rose this past first quarter by 4. 5 percent
from the previous quarter, and were up 5.2 percent year over year — both numbers significantly outpacing wage
growth over that period. Unsurprisingly, principal and interest payments rose to more than 16 percent of a borrower’s total income for the first time in five years at the beginning of 2017.
The math is simple, but somewhat depressing: Strong demand fighting over limited supply is driving home prices
up rapidly, while wage growth has been sluggish at best. Historically low interest rates have helped to keep homes
at least reasonably affordable as the economy has recovered, but what if that situation were to change?
And that question, at last, brings us back to the Federal Reserve, and its seemingly inconsequential rate hike of
25 basis points. While there’s no direct correlation between the federal funds rate and the interest rates charged
on mortgages, the two often move in the same direction, which means it isn’t unlikely that mortgage rates might
inch up a bit from where they were before the increase. In addition, borrowers with credit card balances, and other
debt subject to variable rates are likely to see their monthly payments on those accounts go up, leaving them with
less for savings or mortgage payments.
So, will the Federal Reserve’s rate increase derail the country’s housing recovery? Not by itself, by any means.
But rising interest rates at a time when there doesn’t appear to be an end in sight for rising home prices isn’t going
to help the train get to the next station either. n
Rick Sharga is executive vice
president of Ten-X. He is one of the
country’s most frequently quoted
sources on real estate, mortgage
and foreclosure trends. Sharga has
appeared on top television shows and
briefed government organizations and
corporations on foreclosure trends.
He also conducts foreclosure training
for leading real estate organizations.
Before Ten-X, Sharga was an executive
vice president and primary spokesman
for Carrington Mortgage Holdings.
Reach Sharga at firstname.lastname@example.org.
*Affordability of a median-priced home, with 100 baseline and a lower score equating to less affordable
Source: Federal Housing Finance Agency, U. S. Census Bureau, IHS Economics and Ten-X
U.S. Median Housing Affordability Index*