The Federal Reserve System (Fed) has raised interest rates by a quarter of a percentage point effective December 17th, 2015, for the first time since 2006. While this will affect many different industries; many people are concerned on how this will affect the housing market. Let’s take a quick look at how mortgages will be affected in the real estate market by the Fed raising interest rates.
On Wednesday December 16th, 2015 a decision was made by the Federal Reserve (Fed) to increase the Fed Fund Rates (effective December 17th, 2015), for the first time in nearly a decade, by 0.25%. While this rate hike is certainly not shocking, as a plethora of economists have been foreshadowing this increase for quite some time now; many individuals are still worried and wondering how mortgage rates will be affected by the increase. The good news for perspective home buyers is that because this interest rates increase has been expected for quite some time now, the mortgage markets have apparently had enough time to adjust and prepare for the increase. Leading up to the increase, mortgage rates did not appear to change too much.
Another highly probable reason that mortgage rates have not increased as much as many people may have initially anticipated, is the Feds willingness and pro-activeness in purchasing an abundance of the bank’s Mortgage-Backed Securities (MBS); which consist of a generous portion of the banks home loans all lumped together. The Fed has been purchasing almost all of these MBS’s. With the Fed buying most of the MBS’s; lenders have been able to keep mortgage rates low with the comfort of knowing that the Fed is a reliable, willing buyer for the majority of these securities. While the Feds aggressive purchasing of the MBS’s will inevitably slow over time, it is most likely their hope that private investors will gradually step in and take over the bulk of the MBS purchasing. If this occurs, rates will more than likely stay at a slow and steady rising rate. If not, mortgage rates will undoubtedly raise at a quicker rate. However, perspective home buyers should not be quick to hit the panic button in regards to mortgage rates raising as the increase is more modest than the general media would lead you to believe.
While the Fed was quick to cite promising economic growth, improvements in labor market conditions (job growth), and a national unemployment rate which has fallen to under 5%, for their reasoning’s for increasing interest rates: many economists still feel that the increase is poorly timed and a bit stagflationary; claiming that, if anything, economic growth has gotten weaker, not stronger. Nevertheless, only time will be able to tell us how this increase will affect mortgages in the long run. However, for now, mortgages should still continue to be of good value for perspective home buyers and there is no indication that this will change in the next several months. So if you are one of the many individuals and/or families considering purchasing a home: there is no need to panic. Rates are currently still low and a great bargain; making 2016 a terrific time to invest in real estate!