The surprising way rising interest rates could affect the housing market

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After the Federal Reserve raised the Fed Funds rate by a quarter of a point last week, the real estate industry fretted over the potential effects of higher mortgage rates on home affordability, and how that could curtail the still-wobbly recovery of the U.S. housing market.

So far, there’s been no sign that the market is retreating. In fact, it seems more likely that the Fed’s actions could actually be good for the housing market.

Here’s why.

First, consumer psychology: There’s an entire cohort of potential homebuyers who have known nothing other than historically low interest rates. But now, having seen the Fed raise rates last week, and with two more rate increases considered very likely this year, many of these homebuyers will get off the fence and into the market before rates go any higher. At the very least this should result in more demand through the peak spring and summer selling seasons, and may even drive enough sales to have a positive effect on the overall economy.

Second, lending standards: Higher interest rates may provide lenders with more of an incentive to make loans – and a little bit of a cushion against risk – which will very likely loosen some of the incredibly tight lending standards that have prevented millions of credit-worthy borrowers from getting mortgages over the past few years. Higher rates will also drastically reduce the number of refinance loans being issued, which lenders may try to offset by doing more purchase loans.

Finally, predictability: the 25 basis point hike was well within the range that most industry analysts had expected, which means it’s possible that last week’s hike won’t cause mortgage rates to rise significantly from current levels. In fact, a week later, rates on 30-year and 15-year fixed rate loans are basically unchanged, and still at the low end of historical rates.

Motivated buyers, relaxed lending standards, and marginal mortgage rate increases, coupled with what appears to be strong wage and job growth could lead to one of the best spring selling seasons the housing market has seen in many years.

Commentary by Rick Sharga, executive vice president at Ten-X, (formerly Auction.com), an online real estate marketplace. Follow him on Twitter @ricksharga.

Photo credit: 
Daniel Acker | Bloomberg | Getty Images
First time buyers and a real estate agent, center, enter a home for sale in Warren, Michigan, U.S., on Saturday, March 18, 2017.

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