Interest rates are heading higher. What’s that mean for California housing, car and credit costs?
Interest rates are going to start inching up on cars, homes, credit cards and almost everything else that requires borrowing money.
The Federal Reserve raised its key interest rate a quarter of a percentage point Wednesday, the first such increase since 2018. And it signaled that six more increases are coming this year and three more in 2023.
The impact on consumers is likely to be gradual, and even hardly noticeable at first. Lenders have often baked anticipated increases into their loans, and the Wednesday increase isn’t all that much.
Gokce Soydemir, Foster Farms endowed professor of business economics at California State University, Stanislaus, advises these steps consumers can take right away to cushion the blow of further increases:
▪ Switch from flexible-rate to fixed-rate borrowing.
▪ Refinance while interest rates are still low.
▪ Take advantage of 0% credit cards.
▪ Pay off credit card debt if you can.
The biggest potential impact involves housing, since interest rate changes usually translate into the highest dollar costs and the commitment tends to stretch for a longer time than other loans.
The average mortgage interest rate on a 30-year loan in California — now 3.85% — should rise to 4.2% by the end of this year, said Jordan Levine, vice president and chief economist for the California Association of Realtors.
Based on a projected median California existing home price of $827,700, a buyer who put 20% down would have a monthly mortgage bill of $4,352 at 3.85%. At 4.2%, that figure would jump to $4,481.
Interest rates head up
The Fed is under pressure to curb inflation, as price increases hit a 40-year high last month. Higher interest rates usually keep prices down, as people become reluctant to borrow and spend.
The Fed Wednesday set its target federal funds rate, which largely dictates trends in interest rates, at a range of 0.25 to 0.50%. The rate has been near zero for the past two years, as the Fed tried to keep the economy healthy during the COVID-19 pandemic.
With another six increases on the horizon — far more than it anticipated at the end of last year — the rate is expected to go to nearly 2% by December.
The Fed explained its actions in a statement: “The invasion of Ukraine by Russia is causing tremendous human and economic hardship. The implications for the U.S. economy are highly uncertain, but in the near term the invasion and related events are likely to create additional upward pressure on inflation and weigh on economic activity.”
The California housing market has already felt the impact of higher rates, as lenders have often built anticipated increases into their costs.
“The Fed’s rate hike may not mean that mortgage rates are going to significantly increase. In fact, this latest rate hike could already be baked into mortgage rates,” said Jacob Channel, senior economic analyst at LendingTree, an online lending marketplace.
In February, the interest rate on a 30-year, fixed rate mortgage averaged 3.76%, up from 2.81% a year earlier, according to Freddie Mac. A five-year adjustable mortgage last month had an average rate of 2.87%, up from 2.83% in February 2021.
Buying a house
The California Association of Realtors reported home sales down from last year, a year when sales were unusually strong.
It said last month’s sales pace was down 4.5% from January and 8.2% from a year ago.
“Demand for homes remains strong in California and prices continue to rise in a competitive market environment, but recent headwinds make it unlikely that we will maintain the pace of sales seen in 2021,” Levine said.
The Realtors attributed the slow down to interest rates, but also the uncertainty triggered by the Russia invasion of Ukraine.
Such events, combined with the highest inflation in 40 years, has dampened consumer confidence.
The Realtors’ monthly Consumer Housing Sentiment Index dropped slightly last month, as did the measure of consumers who said it was a good time to buy.
The good news: One of four consumers remain hopeful that it will be easier to find a home in the next 12 months.
But consumers might want to keep an eye on those rates.
“Barring any major disruptions resulting from the invasion of Ukraine, a new COVID variant, or some third unforeseen event, rates are poised to continue to rise throughout the rest of the year,” he said.
He predicted mortgage rates would hit 4% by the end of the year and 4.5% “may not be entirely out of the question.”
Credit card advice
Consumers may want to think about paying off or paying down other loans.
“Credit card rates will probably rise with the 2nd or 3rd Fed increase, as will lines of credit.
So while there will be no surprises, consumers will be impacted by the Fed raising rates,” said Mark Schniepp, director of the California Economic Forecast in Santa Barbara.
The advice of Matt Schulz, chief credit analyst at LendingTree: Get a 0% balance transfer credit card or a low interest personal loan, and consult a credit counselor.
“You could even call your credit card issuer and ask them to lower your APR and even waive some fees. You’d be amazed at how often that works,” Schulz said.
This story was originally published March 16, 2022 at 2:01 PM.
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