Increase in Rates and The Housing Market

The Federal Reserve's decision this week could potentially bring a close to a seven-year streak of very low mortgage rates. Here's what an increase in rates could mean for the housing market.

"The potential move away from zero interest rate policy, for short-term rates, is a harbinger of higher mortgage rates ahead and the beginning of the end of this seven-year era of incredibly low mortgage rates and corresponding high affordability," says Jonathan Smoke, realtor.com®'s chief economist.

The Fed's benchmark short-term rate has stayed near zero since December 2008, which has helped to keep interest rates near historical lows.

But this week, the Federal Reserve removed the word "patient" on its policy statement in reference to rates, and analysts say the removal is a strong hint that the Fed plans to raise rates. The Fed, however, continues to sound caution on a fragile economic recovery. If it does raise rates soon, it's unlikely to push borrowing costs too high, analysts say.

Still, "just because we removed the word 'patient' from the statement doesn't mean we're going to be impatient," Fed Chair Janet Yellen said at a press conference on Wednesday about looming rate hikes. Yellen has chosen to continue to keep rates at near zero since taking over at the central bank in February 2014. The last time the Fed raised rates was June 2006, during the housing boom.

Any increases will likely hinder on the state of the economy, and the Fed has been cautious on the economic recovery lately, scaling back its inflation outlook this year and reducing its expected economic growth.

"The committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium-term," the Fed said. Some economists are predicting a potential increase of 50 basis points over the next 12 months in mortgage rates. Smoke says that mortgage rates that rise to 6 percent could have a big impact to what borrowers pay on their monthly mortgage.

For example, in May, the average loan with a 30-year fixed-rate mortgage was $231,000 at a 4.03 percent average rate, which carried a monthly payment (principal and interest) of $1,107. However, that same loan amount at a 4.53 percent interest rate would jump the monthly payment to $1,175 – a 6 percent increase, according to realtor.com®'s analysis.

First-time home buyers may be particularly hard-hit, as well as high-cost areas.