Federal Reserve Move Indicates That From Here on Out, Mortgage Rates Will Be Going Up
Federal Reserve Move Indicates That From Here on Out, Mortgage Rates Will Be Going Up
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It’s the beginning of a new era at the Federal Reserve: New Chairman Jerome Powell opened his first meeting on Wednesday and, against the backdrop of an improving economy, lifted its key interest rate to its highest level since the housing crisis.
The Fed raised the federal funds rate (the interest rate at which banks lend to one another overnight) from 1.5% to 1.75%, the highest level since 2008. In addition to the anticipated rate change, Powell offered clues about what is in store for the economy and housing market in the months ahead.
The Fed’s view on the economy: Pretty good
We know the economy is doing well. With nearly 2.3 million jobs added in the past year, 300,000 of them in the past month, and the unemployment rate holding at 4.1%, a low not seen since 2000, jobs are plentiful. At the same time, workers’ wages are rising, but not at a fast pace. Hourly earnings have not exceeded a 3% growth rate throughout the recovery, helping to contain inflation.
Along with Wednesday’s decision on rates, we’ll see whether the Fed expects this strong economic growth to continue, what that means for inflation, and how it expects to set rates in the future based on those projections.
Forecasts showed that the Fed generally expects notably stronger economic growth in 2018 and 2019, and better-than-normal growth over the next three years. This expectation is coupled with a lower projection for the unemployment rate, which is anticipated to run almost a percentage point lower than the long-run normal in 2019 and 2020.
Based on the Fed’s December projections, market watchers had been expecting it to raise the federal funds rate three times in 2018, each time by 25 basis points. (A basis point is equal to 0.01%.) In spite of stronger economic projections at this meeting, the median forecast still suggests only three increases in 2018 and three more in 2019.
Remember, mortgage rates don’t move in lockstep with the Fed
So with some of the brightest minds in economics telling us where they think short-term rates will go in the future, we should know what will happen to mortgage rates, right? Almost. But mortgage rates don’t move in lockstep with the short-term rates that the Fed controls. Rather, the federal funds rate inspires the broad trend in longer-dated rates such as for mortgage and 10-year Treasury bonds, but it does not explain the day-to-day or even month-to-month fluctuations.
But if current trends continue and the federal funds rate will be 2.1% at the end of the year, then we can expect mortgage rates to fall somewhere between 4.7% and 5.9%. Unfortunately, this is a pretty big range and not all that useful. However, on the bright side, the spread has typically narrowed in periods of rising federal funds rates, meaning that mortgage rates are likely to move up, but not by quite as much as the federal funds rate.
What this means for home buyers and sellers: Prepare!
Buyers should know that higher mortgage rates are on the horizon. While they may find some days or weeks and maybe even a month or two where mortgage rates trend lower, the general direction in the months ahead is up. Mentally and financially, buyers should prepare for higher rates and look to any deviation from that trend as an opportunity.
Nationally, realtor.com® finds that the impact of higher prices has so far dwarfed the impact of higher mortgage rates from a year ago. Buyers purchasing the typical home listed on realtor.com this year versus last year can expect to pay $168 more per month, with only 36% of that increase being driven by higher mortgage rates so far—but the impact of rates will grow as rates move higher.
In today’s competitive housing market, rising rates are another hurdle that is particularly challenging to young and first-time buyers who don’t have a lot of cash to work with. These buyers should explore financing options (e.g., FHA loans) particularly targeted to help make homeownership possible. They should also set their budget based on today’s rates and consider how their budget would need to evolve if rates were to move higher before they find a home. This way, they can adapt more quickly to the changing environment.
Sellers are often doing two housing transactions at once: selling a previous home and purchasing a new home. On the selling side, sellers should think about what higher mortgage rates mean for the pool of eligible buyers they are marketing to. While in most markets demand from buyers still far outstrips the number of homes available for sale, in a less dynamic housing market with fewer buyers shopping, rising rates may knock some buyers out of the market for your home, which may mean it will take longer to get a solid offer.
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Source: Real Estate News and Advice – realtor.com » Real Estate News