According to Zillow, the Federal Reserve Bank’s strategy of raising interest rates to check rising inflation rates (the Fed’s purpose) has so far erased overall gains for consumers since mid-January 2018.
Affordability is the name of the game here. Affordability worsened by -5% in Q1 2018. If monthly mortgage payments increase another 10% – 15% caused by higher interest rates by the end of 2018, some say home affordability would have its worst annual decline in the past 25 years.
Ralph G. DeFranco, global chief economist of mortgage services for Arch Capital, the parent company for Arch Mortgage Insurance Co., agrees. “A strong US economy combined with a housing shortage in many markets means that there is little hope for any price drops for buyers. Whether someone is looking to upgrade or purchase a first home, the window to buy before rates jumping again is probably closing fast.”
On the other hand, Zillow analysts see the position of current homeowners and prospective homeowners differently. Consumers who already own their homes may benefit. With an average probability of only 5%, ”…the shortage of homes for sale means that the likelihood of local housing busts or even mild price declines over the next 2 years is near historic lows…. In other words, a still low though mildly improving inventory supply, a healthy job market, and still relatively low interest rates compared with historic norms will “protect” current home owners “…at least in major cities.”
Zillow’s outlook for prospective homeowners in less than major cities is less bright. With mortgage rates and home prices moving higher, one with the other in sync, Zillow predicts that the cities where affordability is expected to decline the fastest are Tacoma, Fresno, Baltimore and Boston.