Page 20 - BusinessWest April 18, 2022

little more than they were paying a year or two ago. But by historical standards, when you look at mortgage rates — which have been 6%, 8%, even 20% — it’s not as unbearable.
“Everyone wanted to lock it in when a 30-year mortgage was 2.75%, which was the low point — kind of like saying they wish they’d bought Apple stock early on; everyone wants to time it per- fectly,” he went on. “But in the broader context, these are still really low rates compared to what consumers have seen. It shouldn’t slow down the econo- my tremendously.”
Gimme Shelter
Mortgages will certainly become more expensive following the Fed’s move — at least, the interest costs. Forbes noted that a $300,000, 30-year, fixed-rate mortgage would add about $185,000 in interest charges with a 3.5% rate, but would add $247,000 — almost double the amount of the origi- nal loan — with a 4.5% rate.
“In response to this increase, the family in this example might delay purchasing a home, or opt for one that requires a smaller mortgage, to mini- mize the size of their monthly pay- ment,” the publication notes.
But NPR notes that rising rates
could stop the “runaway train” of high- er home prices, which rose nearly 20% in the U.S. last year, on average. With a historic shortage of homes for sale and very low interest rates, bidding wars regularly broke out and drove prices ever higher. Meanwhile, soaring sell- ing prices pulled in more buyers who didn’t want to miss out, which further overheated the market.
“Higher mortgage rates may be helpful in cooling the housing market,” Selma Hepp, an economist with Core- Logic, told NPR. “That may help bring us back more to some level of normal- ity, and in that case we won’t see so much bidding over the asking price.”
Prices aren’t likely to fall right away, Hepp said, but they might rise much less this year, say 3%, and a few years like that could give contractors time to catch up with demand and build more homes.
Canina notes, however, that low inventory is still the main factor driving home prices in Western Mass. So with interest rates increasing, “that’s kind of a double whammy, for lack of a better term.”
Sullivan agreed. “Lack of inventory keeps prices high, no matter what the rates are.”
Ninety percent of homeowners have fixed-rate mortgages, protect- ing them against rising rates. But most home-equity lines of credit — funds borrowed against the home — have variable rates, which will now go up. Forbes noted that some banks will let borrowers take the money they owe on their line of credit and lock that into a fixed interest rate.
“If they continue to increase interest rates six or seven times before the end of this year, it’s going to be interesting to see what kind of impact that has on the markets and consumers particularly.”
On the other side of the coin, retail banking customers may expect interest rates on savings to rise now as well, but that may happen more slowly.
“These historically low rates on savings products won’t jump higher overnight, but a higher federal funds rate can stimulate competition among banks and credit unions, and consum- ers may benefit from that,” Nerdwal- let notes. “It may be worth looking for a savings account with better rates if your financial institution is slow to respond to a Fed rate increase.”
Canina explained that, from a con- sumer standpoint, banks have been liv- ing with historically low rates, and their margins have been squeezed at the same time the federal government has been putting out trillions in stimulus into the economy. As a result, bank bal- ance sheets have significantly expand- ed with deposits.
“Banks have so much liquidity on their balance sheets, and if loans slow down, even with rates rising, banks
will probably be reluctant to raise [sav- ings] rates,” he noted. “We’ve managed to maintain deposit rates at a higher level than our competitors, and we’ll continue to monitor it to make sure we stay in terms of where we are relative to our competition, but banks are likely not raising rates any time in the near-
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20 APRIL 18, 2022
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