Will Rising Interest Rates Slow Houston’s Real Estate Market?

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Should Houston home buyers and sellers be worried about the impact of rising rates on the real estate market? Perhaps not yet, but it’s worth paying attention to the news. As expected, the Federal Reserve raised its benchmark lending rate on March 15 by 25 basis points, moving its overnight lending rate from 0.75% to 1%. This is the second rate hike in three months, and more increases are expected during the balance of the year.

Economic analysts have been quick to counter each other’s projections. Some expect another rate hike as early as this summer. Others expect a slower climb that could take place over two years. But there’s several reasons why the Fed has taken a more aggressive position for 2017.

Our strengthening economy, along with robust employment reports and rising incomes, is good news for consumers. But as further stimulus is added, which can come from infrastructure spending, higher domestic production and accelerated consumer spending, inflation could rise. The Fed’s answer would be to “tap the brakes” to avoid an overheating economy – by raising the lending rate it charges to member institutions. This increases the cost of borrowed money, and that cost is passed along from banks to consumers.

Evidence of rising rates already exists. As of March 16, Freddie Mac’s weekly mortgage survey shows 30-year fixed-rate mortgages averaging 4.30%. This is the highest rate average so far in 2017. A year ago, this same mortgage had a rate of 3.68%.

Consumers with variable-rate debt, such as credit cards, home equity lines of credit and adjustable-rate mortgages, could see an increase in their minimum required payment in as soon as 60 days, depending on the type of debt and its terms. According to NerdWallet, the average U.S. consumer juggles credit card debt of about $16,748. As interest rates rise, debt-carrying consumers could find it harder to dig out.

While gradual increases in mortgage interest rates may not hold back most Houston home buyers, debt payments and balances affect debt-to-income ratios, which affect mortgage approvals. And as home prices rise, the combination of higher housing costs, larger minimum debt payments and higher mortgage rates can mean less home buying power.

Some real estate economists suggest that mortgage interest rates would need to reach 5.5% before home buying loses momentum. Exactly when we get there is a matter of debate. In the meantime, Houston home buyers, especially first-time buyers, should consider paying down credit card debts and other variable-rate balances in financial self-defense.

Thinking of buying or selling a Houston home? The KW Energy Corridor Team is here to help you! Our local expertise and excellent service makes all the difference. Contact us today for your personal real estate consultation!

KW Energy Corridor Team
Michael Bossart

11757 Katy Fairway | Suite 930
Houston, TX 77079
908-872-9332

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Texas law requires all real estate licensees to give the following information about brokerage services as well as this consumer notice to prospective buyers, tenants, sellers and landlords:
Texas Real Estate Commission Information About Brokerage Services - Texas Real Estate Commission Consumer Protection Notice