It has been nine years now since we have seen the Fed raise rates. After 2008 our economy as we as well as the world economy was in free fall. In order to stimulate the economy and save the financial system the fed made money available at a 0% interest rate, so that capital would flow again to buy goods and services, get the tax base up and running although this was not in and of itself the answer to economic woes. Added to this was Quantitative Easing where the Fed essentially bought it’s own bonds up keeping rates low.
So why would the Fed after all this time raise the rates .25%? Very simply the economy is back on track, not perfect, but back. Not only have we gone through the greatest job creation in history, we have also seen wages start to go higher for the first time since the meltdown. There is one curious anomaly and that is inflation is below the Fed target and that makes this move a bit different. One of the factors is the sharp dip in energy prices which is masking the overall inflation rate. The second is that the Fed is taking on a more proactive stance to combat inflation before it happens rather than reacting to it. This can be a bit of a dangerous game to play but the Fed is signaling it is on the horizon, and energy prices have at the most another year of staying down according tho most experts.
So where does this leave us with mortgage rates? The immediate impact is on short term rates not long term, so for instance buying a car becomes a higher payment on financing. The 10 year treasury Bond moves slower and can actually go move in the opposite direction to the short term. Mortgage backed securities are affected by the 10 year rate but not completely, this is where inflation is important so we are not expecting a big jump if any at all immediately.
What this will do is signal to first time buyers especially that rates do go up and will probably continue to go up and many of these are of the Millennial Generation. Right now 34% of first time buyers are under 33 and that will continue to rise with this largest of generations in the US. What we should see if a bump in home buying nationally as these folks now realize that low rates are not here forever. However, we need to look at the longer time line to see how far rates go and again this is where inflation can raise its ugly head. If that does happen, home appreciation may dampen a bit but not go negative, and pricing on homes will become even more critical for homeowners wanting to sell.
In summary ask yourself this question; Would you rather see the overall economy sluggish with low rates and your buying power continuing to diminish? Or would you prefer the economy taking a more robust path that strengthens the middle class and corrects the income disparity that comes with recession? I’ll take the latter and so will the housing industry.
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