- Benchmark short-term interest rates went up in December, but won't in January.
- The raise in the rate last month means economic confidence.
- Buyers enter the market when they need to, but those already in look at longer term rates for more optional purchase, or as an investment strategy.
As was widely expected, the Federal Reserve raised the benchmark short-term interest rate at its Dec. 19 meeting. It had been at zero for seven years prior to the quarter-point increase.
But what does a move like that mean for the average mortgage consumer, and for the future of the housing market?
Greg McBride, CFA, and senior financial analyst at Bankrate.com, said to expect gradual adjustments to the prime rate over the course of 2016. But, he said, raising the price of money itself might not be the primary driving factor that impacts individual buying decisions.
McBride reminds that mortgage rates tend to move in advance of the Fed’s actions, not after. He said that there was a bump mortgage rates last spring, a move up of almost a quarter of a point in mid-April to mid-May.
He says that demand will remain strong for U.S. debt in the foreign investor market, but still, rates will likely change a bit again. They will likely move higher, but not by the same magnitude as other types of debt.
“I think that the Fed will raise rates three more times in 2016,” McBride said. “Each will be a quarter-point, bringing that price of money to 1 percent by the end of the year.”
He did add, though, that he doesn’t think it’s likely that the next increase will happen at the January meeting next week. That’s the prevailing opinion of many economists as the New Year gets off to a rocky economic start.
HELOC rates, though, move much more quickly, and are tied to the higher, prime rate, McBride explained. “Those changes tend to ripple out much more quickly,” he said. “It takes about one to two billing cycles to see the rates increase. We’re looking at about 4.69 percent on HELOCS now, but by the end of 2016, that could be closer to 5.3 percent.”
And, for current property owners, the longer horizon for rates is worth considering.
Brendan Benzing is the co-founder of a startup called MyNeighbor, but also owns several pieces of real estate in Seattle and Baltimore. He has previously owned property in the DC area as well.
“I currently own four pieces of real estate, and recent interest rates have made me evaluate the mortgages on them,” Benzing said in an email. “I have also been looking at some additional properties and even thinking about selling.
“My perspective on the short term is the rate changes are of little impact, but certainly the longer trend is a concern, especially with the recent activity in the stock market,” he said.
McBride concluded by saying that when considering a home purchase, many people aren’t swayed by minor twitches in the benchmark rates.
“Consumers will buy a house when their needs dictate,” said McBride. “When people are working, and doing well, they’ll buy a house.”
But the delicate dance of what’s going on in the US and global economies always weigh heavily on the policymaker’s minds.
“Interest rate increases are ultimately a vote of confidence in the economy. It means that it’s not on life support, like it was back in 2008,” said McBride. “Interest rates are not about to skyrocket; one rate hike is inconsequential, it the cumulative rate over a year that will make a difference.”