What the Fed’s rate increase means for homebuyers?

The Federal Reserve previously raised its benchmark federal funds rate, this time by 25 basis points to a new target range of 5.00% to 5.25%. This is the 10th consecutive rate hike by the U.S. central bank to combat high inflation.

Why is the Fed raising interest rates?

The Federal Reserve is the central bank of the United States. It guides the economy with the twin goals of encouraging job growth and controlling inflation. The Fed's decision to raise interest rates is based on several factors, including the following considerations:

• Controlling inflation: Interest rate increases are a monetary policy tool designed to control inflation. Inflationary pressures can occur when economic growth is strong and the job market is tight. By raising interest rates, the Federal Reserve can raise borrowing costs and reduce consumer and investment spending, thereby curbing inflation.
  
• Stabilize the economy: Interest rate hikes are also intended to maintain stable and sustainable economic growth. Moderate interest rate hikes can prevent the emergence of economic overheating and bubble risks, help adjust markets and asset prices, and contribute to keeping the economy in balance.
  
• Job market regulation: Another goal of the Fed's interest rate hikes is to achieve full employment. By adjusting interest rates, the Fed tries to balance the job market to avoid the risk of too rapid inflation or recession.

What is the impact of the Fed's interest rate hike on home buyers?

1. Increased borrowing costs: When the Federal Reserve raises interest rates, bank borrowing rates usually go up as well. This means that homebuyers will have to pay higher interest rates to borrow money to purchase a home. Higher borrowing costs may increase the financial burden on homebuyers, resulting in a constrained home buying budget or reduced loan approvals.

2. Mortgage rates may rise: A Federal Reserve interest rate increase may lead to higher mortgage rates. Homebuyers may face higher interest rates when applying for a mortgage, thereby increasing their monthly repayments.

3. Weakened market competition: Higher borrowing costs and higher mortgage rates may affect homebuyers' purchasing power and credit availability. This may result in fewer homebuyers and a less competitive market. In a buyer's market, homebuyers may have more choice and room to negotiate, while in a seller's market, sellers may face less competition and changes in deal terms. From this perspective it favors the homebuyer.

4. In terms of housing prices: An interest rate increase may have an impact on the supply and demand relationship in the housing market. If there are fewer homebuyers, it may lead to a decrease in demand for housing, which in turn may have a dampening effect on housing prices. However, the real estate market is affected by a number of factors, of which interest rate hikes are only one. Currently, there is not enough inventory in the real estate market to keep up with the supply, especially when it comes to existing homes. As a result, the suppressed demand may maintain higher prices for quite some time. Some buyers may exit the market for a while.

Do homebuyers need to be bothered by this?

Although the Fed's interest rate hike may cause mortgage rates to rise. Homebuyers do not need to worry about this. Because mortgage rates may not rise much and may even fall in the next few weeks.

While a Fed rate hike may cause mortgage rates to rise, mortgage rates are long-term. There is a big difference between them and the federal funds rate. Mortgage rates are related to the outlook for inflation. When inflation rises, mortgage rates also rise. When inflation falls, mortgage rates fall. Thus, if investors believe that the Fed's rate hikes will succeed in holding down inflation, mortgage rates will fall.

This situation was previously validated when the Fed raised the federal funds rate by 0.25 percentage points on March 22 of this year. Meanwhile, Freddie Mac's weekly survey showed that the average rate on 30-year fixed-rate mortgages fell to 6.43% in the week of April 27 from 6.6% in the week of March 16.

What homebuyers can do next if interest rates rise?

Higher mortgage rates shouldn't stop you from going from being a potential homebuyer to the latest American homeowner. Oftentimes, life situations also require a timely response, such as if you just had a baby and need more space or you have to move for work, you may be forced to buy whether it's a desirable market or not. And with not enough inventory, home prices are likely not to decrease and higher interest rates may promote a less competitive market, all to the benefit of homebuyers.

If you have a fixed-rate mortgage, you don't have to do anything because your interest rate won't change at all. If you have an adjustable-rate mortgage, then your interest rate will likely go up if it expires and needs to be adjusted.

There are several things you can do to prepare for any challenges the real estate market may present to you:

1. Financial planning and budget management

Review your personal finances, set a reasonable budget, and ensure that your buying decisions are in line with your personal financial situation. For example, if you can pay off your credit cards, if you carry credit card debt, this means that your monthly payments will increase and you will pay more in interest. If you currently have credit card debt, consider being more aggressive about paying it off.

2. Find a Realtor

Working with an experienced real estate agent may be the best way to navigate the challenging real estate market. A good agent can help buyers find a property within their budget. They can also be the primary negotiator on your behalf when it comes to getting a fair price and avoiding overpaying for your home.

3. Loan Rate Comparison

If planning to purchase a home or make other large purchases, it is advisable to compare different lenders and interest rate options. Look for competitive loan rates to minimize the cost of your loan. Here we recommend YouLand, especially YouLand bridge loan, which can simplify the loan process and meet your needs to the maximum compared to general bank loans, with the following advantages:

Suitable for foreigners, especially new immigrants
Do not check income, do not check employment
Offer the most competitive interest rates
Fast, with transactions completed in as fast as 3 business days

And with YouLand's new POS system already online, you can submit and track your loan application 100% online and get pre-approved. Consumers can open the link on the web side to try it out! 

4. Research the real estate market in depth

Learn about the real estate market in your area, including home price trends, supply and demand, and market expectations. This can help homebuyers make informed buying decisions and adapt to market changes.