After a decade of keeping interest rates at almost zero, the Federal Reserve raised interest rates last Thursday by a quarter of one percent and gave indications that they want to raise rates by a quarter of one percent each quarter in 2016. It’s the first interest rate hike in nine years and they signaled that further increases will likely be made slowly as the economy strengthens further and inflation rises from undesirably low levels.
They didn’t raise the 10-year treasury on which mortgage rates are based. No, the Federal Reserve (FED) raised the Fed Funds rate. Mortgages are not based on this rate, but revolving credit is based on the Fed Funds rate as is the prime rate at banks. The prime rate is the rate that only the highest quality borrowers get. It’s interesting that banks were quick to hike the prime rate, yet deposit rates didn’t budge.
What does this rate increase mean for homebuyers? Immediately it means little, but if the 10-year rate goes up, then mortgages will cost more and you will be able to afford less house. We have experienced the lowest mortgage rates in my lifetime.
Matthew Gardner at INMAN offers “a little perspective might help: the average rate for a 30-year loan in the 1970s was 9 percent. It was 13 percent in the 1980s and 8 percent in the 1990s. And yet people still managed to buy and sell homes throughout those years. With that in mind, the rate increases we’re likely to see in 2016 are nothing to fret over.”
It remains to be seen if the economy is strong enough to weather these rate increases. The FED seems to think so. I wonder. Here are some headlines I read today on Zero Hedge:
· Billionaire Sam Zell Warns The Fed Is Too Late, “Recession Likely In Next 12 Months”
· US Manufacturing PMI Plunges To Lowest Since 2012 As Factory Orders Collapse To 2009 Lows
· Faltering economy brings real estate market down with it
Maybe the FED responded to this headline:
· Housing Starts Bounce As Permits Surge Most In 5 Years On Multi-Family Spike
Mathew Gardner concludes that he believes “… interest rates will rise above 4 percent, but we will not see a sharp spike in rates. The Fed has stated that any upward movement in the Fed Funds Rate will be slow and steady and will reflect the greater economy.
He does acknowledge that “… any weakness in the global economy can actually have a downward effect on interest rates. This is referred to a “flight to quality.”
In essence, investors seek safe haven during times of economic uncertainty. If markets outside the U.S. continue to underperform, there will likely be increasing demand for bonds, which will drive up their price and drive down interest rates. However, a rise in rates in the U.S. will also strengthen the U.S. Dollar. Almost every country that competes with the U.S. have been devaluing their currencies to maintain exports. A strong dollar will cut our exports and make imports cheaper. That will only depress the growth in the U.S.
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