The Federal Reserve finally raised interest rates in December by 0.25%, and... not much happened. The interest rate hike was merely the first step in a long journey to restore interest rates to normal levels. If you are a millennial, however, you have known nothing but near-zero interest rates for most of your adult life and probably find the concept of normal interest rates frightening.
That may explain the results of a recent study by Berkshire Hathaway HomeServices (BHHS). Their Homeowner Sentiment Survey explored the differing attitudes toward the rise in interest rates and the expected effect on mortgage rates. Prospective homeowners, primarily millennials, have greater concerns about how rate hikes will affect their finances.
BHHS found that millennials are more sensitive to the effects of an interest rate. While 43% of the survey participants believe that an interest rate increase will have a "strong impact" on or will "somewhat impact" their lives, 66% of the millennials surveyed chose one of those two responses. It should then come as no surprise that a rise in mortgage rates makes 60% of the millennials surveyed feel "anxious," compared to 43% of all respondents.
Half of the millennials surveyed did not realize that current mortgage rates are at historic lows. Older homeowners have a different perspective on the current mortgage rates, remembering the days of double-digit fixed rate mortgages from the late 1970s through almost the entire 1980s. There is still some perspective loss — 32% of all survey participants did not realize that mortgage rates were at historic lows.
The average Fed interest rate since 1971 is 5.93% and the seven-year run of near zero rates with correspondingly low mortgage rates is a complete historical anomaly. Yet in the BHHS survey, 67% of the prospective homebuyers identified today's mortgage rates as either average or high. From 1971 to 2000, a range that includes recessions and booms, the average thirty-year fixed mortgage rate was always higher than 7% and often well above that mark.
In general, there has been a slow decrease in rates from 2000 down to the 2015 average that should finish near 3.8%. Only the post-housing crisis year of 2012 had a lower rate of 3.66%. Why do millennials find this disturbing? Most likely because they were hit the hardest by the Great Recession as they were just starting their careers — or prevented from starting them. If you have trouble paying your bills and buying a home with historically low interest rates, how can higher rates improve the situation?
Millennials do have a point. The reason interest rate increases are shrugged off more often than not is because they correspond to solid growth and economic strength. The Fed generally raises interest rates in order to cool an overheated economy and keep inflation low. That is not the case this time, as inflation is near zero and not likely to increase in the short term. Combine higher interest rates with slower than usual growth and millennials may indeed have a more difficult time saving and buying homes.
When the general anxiety level of millennials is added into the mix, the survey results are highly predictable. The American Psychiatric Organization declared the millennials to be the most stressed-out generation in 2013, and since then, little has changed to alter that assessment.
BHHS provides some perspective on the interest rate rise in their press release announcing the survey results. They cite Gino Blefari, the CEO of HSF Affiliates, who uses the example of a $300,000 mortgage with a thirty-year fixed-rate of 3.75%. Raising that rate to 4% results in around $43 per month in extra payments. Blefari points out that, "The average American spends about twice as much every month on coffee."
Cutting your coffee intake in half could be a rude shock, but whether you are a millennial, Gen-Xer, or Baby Boomer, you would likely adjust. Nobody enjoys interest rate hikes, but they are not the end of the world, either. Millennials, grab a cup of herbal tea and relax.