Will a Fed Increase in Interest Rates Cool the Housing Market?
The Fed will increase rates at some time; the question is just a matter of when. Some economists believe that will happen before the end of 2015, and others think that will happen in the first half of 2016. I think 2016 is more likely. The question is how will even a small increase in rates affect the housing market? A recent article in the Wall Street Journal suggests that a rate increase will affect markets differently depending on the price of homes. That is, a rate increase will affect expensive homes more than lower price homes. Then, expensive markets like San Francisco, Seattle and Denver would see a dampening on home appreciation.
I'm not convinced that such an effect is very large. For example, a 30-year, $640,000 loan at 4% vs. 4.5% is only a $200 difference out of a $3,000 payment. I can't see that difference being very meaningful in terms of a $800,000 home purchase. However, markets are driven by the perception of change and expected future change as well, and that may have a larger affect on the market. Housing markets are also heavily affected by housing inventory and new housing coming on to the market. There are several factors that effect housing prices, but, ultimately, an analysis of price trends in a specific market is paramount. Price change analysis will give you the most reliable picture of past and expected future price action.
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