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Rate Hike or no Hike? Home Shoppers Remain Undeterred

cash-moneyTomorrow all eyes are on the Federal Reserve, and the housing industry could experience a shake not felt in over nine years. The industry has been practically holding their breath anticipating what the Fed may or may not do after the Federal Open Market Committee wraps up its last meeting of the year.

So the question on everyone's mind is: Will the Fed raise rates? And if so, by how much?

As much as it may seem home shoppers may be discouraged if the interest rates are higher, a Zillow survey found that the increase will not affect those wanting to buy a home within the next year.

The survey showed that 70 percent of consumers that are currently looking for a home or plan to buy a home in the next year will proceed with their intentions even if rates go up to 4.5 percent.

However, the home shoppers are prepared to make a few adjustments to their initial plan in the 50 basis point increase in mortgage rates happens tomorrow.

According to Zillow, 45 percent of current home shoppers noted that they would consider purchasing a smaller home or looking in a less expensive neighborhood.

"If the Fed does decide to raise rates this week, as we expect them to, there is no need for future homebuyers to feel that they've missed the ideal window of time to purchase a home," said Erin Lantz, VP of Mortgages for Zillow Group. "It's important to remember that while a hike would result in higher rates than we have been accustomed, they are still historically low. Mortgage rates are an important factor to consider during the home buying process, but personal considerations about the home type and location should trump concerns about moderate rate changes."

Affordability is not expect to be a huge issue among potential homebuyers—at least not right away. Zillow said that buying a home is still more affordability than it has been in past years.

If mortgage rates rise from 4 percent to 4.5 percent, this would raise mortgage payments on the median home in 19 percent of the country's top 500 metros by less than $25 per month. The survey showed that already-pricey metros such as San Francisco, California or San Jose, California will be affected the most as affordability continues to be problematic for these areas. In these cities, mortgage payments could rise by $175 or more if the Fed raises rates.

The survey found that consumers are more concerned with other things such as finding an affordable home amidst low inventory (29 percent), followed by saving for down payment (19 percent). An interest rate increase was ranked low on the list of concerns overall, and 14 African Americans said it was a top concern. Millennials are more concerned with qualifying for a home loan than mortgage rates.

"The larger concern for future homebuyers is the Fed's commitment to a path of rate hikes in the months ahead," continued Lantz. "If the Fed continues to raise rates on a monthly or even quarterly basis, then it is more likely that we will eventually see the end of the era of incredibly low mortgage rates and corresponding high affordability."

The Collingwood Group's Director Tom Booker agrees that the rate hike could spike potential homebuyers' interest.

“The rate hike is a balancing act. For many in real estate, raising the cost of borrowing seems ill timed, but for home buyers this may increase interest and activity,” he said. "The real calculus is a function of what the markets believe the next move is. Will we see one or two moves this year. Ultimately if the near term target for interest rates is 2 percent the path will be bumpy in the housing markets but affordable."

Click here to view the full report.

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