The Texas Real Estate Research Center has issued the following press release:
COLLEGE STATION – Higher mortgage interest rates are the potential byproduct of this week's announcement by the Federal Reserve that it’s raising the federal funds rate, which previously hovered near 0 percent, by a quarter point (i.e., 25 basis points).
"This is the first of what economists say could be as many as seven increases in 2022," said Dr. Clare Losey, assistant research economist with the Texas Real Estate Research Center (TRERC) at Texas A&M University. "Such increases diminish purchase affordability, making it even harder for lower-income and first-time buyers to purchase a home.
"Depending on the number and magnitude of rate hikes, 2022 home-purchasing potential could decline an estimated 3.3 to 6.6 percent for repeat buyers and 2.3 to 4.6 percent for first-time buyers."
She noted that a $200,000 home has a total monthly mortgage payment of $1,299 with a 2.5 percent interest rate. A 4 percent interest rate increases the payment by more than $100 to $1,431. Actual numbers depend on a variety of factors, such as the loan-to-value ratio and the loan term.
"Changes in the mortgage rate can significantly alter the amount of income a household needs to qualify for a home loan," said Losey.
"For a conventional loan on a $200,000 home with a 2.5 percent interest rate, a household needs to earn $51,954 annually.
"With a 4 percent interest rate, the income required increases to $57,221. With a federally backed loan, the required annual household income increases from $71,733 to $76,984."
In 2020, more than 60 percent of Texas households earned the required income to qualify for a conventional loan on a $200,000 house at a 2.5 percent interest rate. However, that drops to 56.7 percent when the interest rate increases to 4 percent.
The fed funds rate is the interest rate at which depository institutions trade federal funds with each other overnight, said Losey. The Fed bears a dual mandate to maximize employment and adjust the fed funds rate to stabilize prices.
"When the Fed raises the fed funds rate, the cost of borrowing capital increases," said Losey. "In other words, interest rates for credit card loans, car loans, student debt loans, and mortgage loans gradually increase. An increase in the fed funds rate will not necessarily result in the same increase for other interest rates."