Higher interest rates will drive up California housing costs

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Mortgage rates could rise as the Federal Reserve signaled on Wednesday that it was inclined to raise rates this year.

Mortgage rates could rise as the Federal Reserve signaled on Wednesday that it was inclined to raise rates this year.

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Housing may be more expensive. Interest on credit cards, cars and student loans is expected to rise. And interest on savings is not expected to rise as much, at least not before the end of this year.

Those were the main takeaways California economists took from strong hints from the Federal Reserve on Wednesday that it would soon begin raising interest rates for the first time in three years.

“I think there is room to raise interest rates without threatening the labor market,” President Jerome Powell said. Although he gave no timetable, the first increase could come as early as March.

The good news is that increases are expected to occur gradually throughout 2022, so sudden jolting in monthly loan payments is unlikely. The sobering news is that the golden age of borrowing at rates not seen in generations is likely over, and any policy-triggered economic downturn will hit vulnerable communities more than others.

“Since everyone is now expecting a rate hike, much of the increase is already built into the cake. So no surprises,” said Mark Schniepp, director of the California Economic Forecast in Santa Barbara.

For residents of areas where the economy has been more fragile, such as much of the San Joaquin Valley, the impact of interest rate hikes could ripple quickly.

“There is no doubt that they will feel it. This is going to affect people in many ways,” said Gokce SoydemirFoster Farms endowed California State University business economics professor Stanislaus on the region’s effect of interest rates and other new Fed policies aimed at slowing inflation.

Much of the Valley’s workforce is unskilled, and when the economy starts to slow, “they are the first to be laid off, to feel a drop in their purchasing power,” he said. -he declares.

Higher mortgage interest rates

Here are some questions we asked and answered by Soydemir, Jordan Levine, Chief Economist for the California Association of Realtors; Sung Won Sohn, chairman of Los Angeles-based consulting firm SS Economics and others:

Q If I wait until later this year to lock in a mortgage rate, how much more will I pay?

A. Based on the expected median California home price of $835,000, an average rate increase of 3 to 3.5 percent would cost the homeowner an additional $183, to $3,957, Levine said. If the rate were to increase to 4%, the increase would be $373, for a monthly payment of $4,146.

Q. Will housing prices also increase?

A. Prices are determined by a host of factors, including supply and demand, location, inflation, and people’s confidence in their future.

Rising interest rates have been anticipated for some time, and last month the California Association of Realtors predicted that the median home resale price would rise 5.2% this year, well below the increase 20.3% from last year. The 2022 median price is forecast at $834,400, compared to $793,100 in 2021.

Q So is it the right time to buy a house?

A. There is no easy answer. But remember that when shopping for homes in California, Sohn said.

“Historically, there has been an excellent correlation between the Treasury rate and the mortgage rate. What matters most to the interest rate are expectations.

So, he said, “what matters to the credit market is not what the Fed is doing today, but what it should be doing in the months ahead. We act according to expectations.

More interest on other loans

Q What will happen to other loans, such as student debt?

A. Private loan interest rates are expected to rise. Experts advise paying as much as possible before this happens. Ditto for credit card interest. Low-income people will quickly feel the sting, Soydemir said.

“People are going to default and it’s going to affect their credit rating,” he said, and when that happens it becomes harder to buy anything that requires a loan.

Q Will I get a better return on my savings?

A. Probably not much. While financial institutions will need to offer higher rates to attract savings, the increases are likely to be minimal at first.

Ken Tumin at Depositaccounts.com predicted that it could take two Fed rate hikes before savings rates start to rise.

Q So maybe by the end of the year we’ll see a big move in rates. Why so slow?

A. One reason, Tumin said, is that deposit levels at banks remain high, thanks to government stimulus checks issued during the pandemic and lower leisure spending. In the San Joaquin Valley, for example, bank deposits grew by more than 21% in 2020.

“Most banks don’t need deposits, so they’re free to keep rates at record highs,” Tumin said. “Until lending levels rise and deposit levels fall into more normal ranges, banks may not be in a rush to raise rates after the Fed’s first rate hikes.”

If the Fed acts more aggressively with rate hikes this year to combat soaring inflation, he said, that could mean faster rate increases on savings accounts in the second half of this year. year.

David Lightman is McClatchy’s chief congressional correspondent. He has been writing, editing, and teaching for nearly 50 years, with stops in Hagerstown, Riverside, California, Annapolis, Baltimore, and since 1981, Washington.

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