Who Loses As The Fed Hikes Interest Rates?
Who Loses As The Fed Hikes Interest Rates?
I am getting very nervous for many of my new homebuyers. As of January, the average home price in Austin is almost $600K according to realtor.com. When I first started selling a unique product line in Elgin, TX about two years ago, I could hardly wrap my head around the idea that I had a 950 square foot home, with two bedrooms, one bath and NO garage selling for $171,000. Today, I am selling that home for $250,000. I call it my condo on grass. Elgin is a tiny little ‘burb about 25 miles from Austin’s city center. For years, the only reason you stopped there was to buy amazing sausages as you drove to or from Houston. Now, it’s one of a few suburbs first-time homebuyers can afford within driving distance of town. So who loses as the fed hikes interest rates? First time homebuyers, minorities, the lower middle-class, recent college graduates, and America in general.
It’s not like we haven’t seen this coming. We’ve been talking about it for months over the water cooler. It’s the right thing to do for the economy, but the impact in real life may be harder than many anticipate. What many folks don’t know, especially first-time homebuyers, is that lenders don’t typically “lock” an interest rate on your loan until about 30 to 60 days before you are set to close on your home. For a resale home, that’s usually fine. You find a home and they lock the rate within days.
But when you are buying a home from a builder, it is frequently many months from the time you write a contract until you are set to close on the home. So what happens when you write a Purchase Agreement in December for a home to close in May? A homebuyer is generally given a “conditional approval” on a home loan based on interest rate averages at the time of the contracting. That means the loan isn’t set until March or April. Frequently, young or lower income homebuyers are already on the cusp of loan approvals when they purchase. The moment the interest rates increase with any significance, they are now disqualified for the loan. According to Reuters:
“The Federal Reserve on Wednesday raised interest rates for the first time since 2018 and laid out an aggressive plan to push borrowing costs to restrictive levels next year in a pivot from battling the coronavirus pandemic to countering the economic risks posed by excessive inflation and the war in Ukraine.
The U.S. central bank’s Federal Open Market Committee kicked off the move to tighten monetary policy with a quarter-percentage-point increase in the target federal funds rate, lifting that key benchmark from the current near-zero level in a step that will ripple through a variety of other rates charged to consumers and businesses.”
Let me tell you what that looks like in a real-world scenario. John and Mary are soooo excited. They have finally scrimped and saved to put together a modest down payment on their first home. They just got married a couple of years ago, they have been renting for years and have their first child. They finally (and I do mean FINALLY) found a home just after Thanksgiving that is small but affordable and a bank has told them they qualify for the loan. They are over the moon. They bring in their parents and friends over the next few months dreaming of the room for their baby, the backyard birthdays and meeting new families just like them to BBQ with. To every building update I send them, they reply with smiley-face emojis and exclamation points. I can almost see their tails wiggle like a puppy. I have done my best to prepare them for the worst, but they never listen because they see the American dream within grasp.
In the next month or two I will have to make some of the worst phone calls. The lender has just picked up their file for the first time in months to prepare it for underwriting. They are plugging in all the numbers and looking to lock the interest rate. I get a call from the lender telling me that John and Mary no longer qualify for the loan as interest rates have spiked and their debt-to-income ratios no longer are in line for the loan program they anticipated. We are two months away from closing on the home John and Mary have been dreaming of for months and it slips through their fingers like dry sand. It is heartbreaking.
In the meantime, in hot areas of the country like Austin, we have seen home prices jump $50,000 overnight. The $250,000 affordable home John and Mary purchased back at Thanksgiving is now $300,000. The dream is literally out of reach. Washington Post has a great write up of the cascading effect this first of many hikes will have:
“Even though much of this is anticipated, when short-term rates rise, there’s going to be a bump in mortgage rates and a bump in the cost of capital — and that will happen immediately,” said Jeffrey Bergstrand, an economics and finance professor at the University of Notre Dame and former economist for the Federal Reserve Bank of Boston. “Some families just won’t be able to afford those higher monthly payments on a new house or a new car. That will reduce the demand for those things and have a slowing effect on the economy.”
I'm glad I refinanced before Biden came into office.— TuPakalolo (@BiggerBraddah) March 16, 2022
I can’t prove a negative, but I am just so angry because I believe much of this was avoidable. We created this crisis with Corona Virus stimulus money that was just a grab bag of porkulous spending! We let loose a monetary windfall creating a butterfly effect that was predictable and then followed up with one bad policy decision after another, like killing the keystone pipeline and choking off investments in oil and gas exploration here in the US. Joe Biden has created an economic nightmare for America as these rate hikes ripple through the economy. MSMBC spells out the needle the Federal Reserve will try to thread:
I know we need to slow the bleeding of inflation. I know it’s the right thing for the Federal Reserve to do. I just wonder how much pain the left can inflict upon those who can afford it least before they wake up to who caused it. FJB.