By John H. Hilton
The Federal Reserve raised the federal funds rate last month by 0.25 percent, and there is chatter out there that another small hike may be imminent.
For those who watch the Northern Virginia real estate market with an almost daily intensity, blood pressure medicine could be in your future. Or perhaps, not so much. Conventional wisdom says a rise in interest rates will take at least some potential home buyers off the market. In fact, that wisdom goes so far as to say that first time buyers on the whole will stay home during the prime listing months of March through June.
But is this true?
President Harry Truman was interviewed for a news story shortly after he left the White House. The reporter asked him if he had in mind anything different he wished he did while in office. The president retorted that he would have hired only “one-armed economists.” The joke being of course that economists are famous for claiming that something will happen and in the same breath say, “but on the other hand.” So proceeds the usual conversation over interest rates and home sales.
On one hand, the higher the mortgage rates, the fewer the buyers in the market. On the other hand, the number of buyers does not directly determine the price of your listed house. The one key factor that is certain to affect the sales price of homes is the supply of homes on the market. Or in academic terms, all things being equal, supply determines the price of a good. If there is a spike in listed housing inventory similar to yours this year, you will probably get less for your house. A dearth in inventory will most likely produce the opposite result.
I am not an economist, or even a mortgage banker. But I have sold real estate in our region, and I studied more than my share of these subjects in school (Walter E. Williams was my microeconomics professor). Still, I don’t want you to rely on my word for such a sensitive subject that literally hits you where you live.
So I sat down recently with Bill Burnett, President of the Virginia Association of Mortgage Brokers, and a veteran of over thirty years in the industry. I asked him what, if anything, has the rate increase done to the regional housing market and the economy in general, whether or not he expects another hike in early 2017, and should people in Northern Virginia who want to sell their homes be worried.
He offered the following thoughts:
“The Fed hike and the election have increased rates between ½% and ¾% across the board and are now at a two year high. The housing market is still performing well on the equity increase side but the inventory is very low. The home affordability index is showing that housing in our area and nationally has become harder to afford. If the economy responds to the new administration’s plans to create more jobs and increase spending on infrastructure then incomes will start to catch up with the home value increases and we could see more inventory come onto the market and the affordability become more sustainable.
I don’t anticipate another hike at the next Fed meeting because I think they will be in a “wait and see” mode to get a feel for how the economy responds to the first rate hike. The markets are anticipating several rate hikes this year based on the Fed statements projecting at least three rate hikes in 2017. The Federal Reserve is anticipating the economy to start moving in the right direction with growth returning to the 3% plus range on an annual basis and expects inflation will start to creep into the economy as the growth numbers increase. In my opinion, the Bond Market where Mortgage Backed Securities are traded has some amount of future rate hikes already built in to the market.
Spring should be very active for housing activity, both buying and selling, and most projections are for 2017 to be better than 2016. There should be a little more increase in rates through 2017 but they should stay very close to current levels.”
Additionally, he thinks our regional home values could be up 4% this year.
If what he projects is accurate, then those Northern Virginians who want to list their homes and those who want to buy a home should find a more hospitable environment to do business than last year, even though rates will be slightly up. The Fed has been holding rates artificially low to keep the real estate market stimulated. At some point that strategy wears thin, for if rates are at rock bottom and a buyer stimulus is required at some point, a rate slash as a tool in the Fed’s arsenal is unavailable. Also, the rate increase two weeks ago was modest, as will be any others due to inflationary concerns. Keep an eye on the overall inventory, and the inventory of homes like yours.
Remember, supply determines price (all things being equal).
John H. Hilton is a business writer and regular contributor to The Loudoun Tribune. A native northern Virginian, John is a veteran top-producing sales industry leader with expertise in insurance, real estate and financial services.