From the FOMC statement, it doesn't sound like the low rate environment will disappear too suddenly:
"The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run."
Looks like the stock market reacts positively to the rate hike. But its effect on the general population remains to be seen, specially in the mortgage industry. Will more people shun buying houses? Banks are more willing to lend money with higher interest rate.
I would imagine that housing will stay flat. New mortgages and new rentals will both increase in cost as lending costs rise. IIRC, generally, a higher interest rate environment will incentivize people to go from renting to home ownership as rents increase due to increase lending costs & lowered/flatter housing costs.
Each 1% hike in interest reduces the leveraged buying power of all buyers about ~$21k per $1000 mortgage payment.
The maximum monthly payments for a mortgage are capped at 36-44% Debt-to-Income (DTI) ratio. At the 36% DTI, a hypothetical Joe with no debt making 10k/mo, will be approved for about $2000/mo mortgage. Today's market at 4% means Joe can get a $418k loan. By 2018, with interest rates moved up 2%, he would only be able to get a $334k loan with that same $2k.
Banks make money on the rate arbitrage. Currently, they get money at .25% and loan it out at around 4%. I'm guessing they will be borrowing from the fed at 2% and loaning it out for around 5.75-6% if we stick to the 2% rate by 2018. But I think long-term mortgages are tied to treasury bonds.
If it causes enough people to affect the lending volume, the mortgage lenders may be willing to take a small hit to their margins and try to make up for it in volume.
I guess we will see. People generally aren't willing to sell their homes for a loss, so I'd imagine that realestate will stay relatively flat for a little bit.
Additionally, you can buy discount points to reduce the mortgage interest rate. So it's either a reduction of $21k as you said, or $3000 more due at closing to buy the discount.
"The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run."