How Do Interest Rate Increases in the U.S. Impact Relocation Programs?
On December 16, the Federal Reserve raised its key interest rate from a range of 0-0.25% to 0.25-0.50%. The news wasn't earth-shattering, as this was long expected by Fed watchers based on continuing strength in the economy. Reading the business news on the day of the announcement and shortly thereafter, the prevailing attitude among pundits across all markets is that it will have a gradual, long-term impact in many areas, from savings to mortgage rates.
The words “gradual, long-term impact” are important. Although banks aren't going to start handing out high-yielding money markets immediately, neither are mortgage rates going to leap from slightly below 4.00% to a level that is through the roof. This reality was factored into the Fed's decision making, again, based on all of the economic data that showed the economy was not only strong enough to handle, but would actually benefit from, an incremental increase—incremental, because those same Fed watchers note that there will be a similar move (or moves) in 2016.
Mortgage Rates in Perspective
In terms of mortgage rates, here is an interesting figure: 6.41%. That was the annual average for mortgages in 2006.1 Why do I share this? To compare how low today's mortgage rates are when compared with their historical peers. Currently, mortgage rates are well below that number and, while they have nowhere to go but up, that rise, to repeat the word, will be gradual. As far as mortgage rates go, there is more than just one factor—in this case, the Fed rate—that makes up the U.S. economy and, by extension, mortgage rates, ranging from the price of oil to international politics and more. It is also important to understand that something like mortgage rates, which are influenced by (but not cemented to) the Fed rate, have time to prepare for something like the recent hike; it had been hinted at, if not expected, for over a year.
What Does This Mean for Relocation Programs and Transferring Employees?
So, how does this impact relocation programs and transferring employees? The 30-year fixed interest rate averaged 3.85% over the past year and 4.5% over the past 5 years, hitting a low of 3.35% in November 2012. Interest rates have been trending upward recently, but they are still below 4%.
When rates do begin to rise, borrower buying power is going to be affected, and this can impact transferring employees’ ability to finance a home in the new location. For instance, a 1% rise in interest rates lowers affordability by roughly 10%. Let's take a quick look at what all of this percentage-point discussion means to homebuyers. The math is somewhat complicated (and you can read it by clicking the link in the footnote), but if we look at a 15-year loan at both 5.00% and 5.25% interest rates, the monthly payments would be $1,581.59 and $1,607.76, respectively—a difference of $26.17.2 It is important to note, though, that not every scenario is the same; in some circumstances, a quarter of a percentage point could make the difference between a deal closing or falling through.
Although it is a “prevailing" opinion that mortgage rates will rise, the reality is that they have been historically low for so long that, setting aside theories and Fed actions, common sense dictated that they had to (will have to) go up at some point. For now, "calm" should rule the day for homebuyers. They should continue looking for their next home with the same sense of excitement and adventure, while also keeping an eye on rates. We will continue to keep you updated on any changes in the mortgage landscape.
- "30-Year Fixed-Rate Mortgages Since 1971," Freddie Mac, http://www.freddiemac.com/pmms/pmms30.htm.
- McWilliams, Sarah, "How Much Difference Does .25% Make in a Monthly Mortgage Payment?" SFGATE Home Guides, http://homeguides.sfgate.com/much-difference-25-make-monthly-mortgage-payment-100688.html