- It was time for a rate hike, and mortgage rates have already increased in anticipation of one.
- The markets should adjust, though the rate of adjustment will depend on whether the Fed plans more hikes in 2017.
Last December, the Federal Reserve raised the federal funds interest rate — the rate at which banks exchange money — for the first time in nearly a decade, by 0.25 percent.
Since then, there’s been discussion all year about when the Fed will make its next rate hike; although the Fed rate isn’t the same as the mortgage loan interest rate, Fed rates do apply pressure upward or downward on mortgage loan rates.
Today, the Fed met and decided to hike rates by 0.25 percent, and penciled in three more quarter-point hikes throughout 2017.
What’s that mean for you and your clients?
It was about time — and that’s why mortgage rates are up
“I think that the day has finally come that people have been talking about for two years when you start seeing a steady rise in interest rates,” said Steve Cook, editor of Real Estate Economy Watch. “Interest rates don’t switch direction easily, it takes a period of time, and the stars are now truly aligned to see what the Fed anticipated happening a year or so ago.”
“So mortgage rates — at this time three weeks ago, most economists would say ‘mortgage rates might go up slightly, especially if the Fed decides to act in December.’ That story is essentially out the window,” said Ralph McLaughlin, chief economist at Trulia.
“We’ve seen rates move pretty solidly upward; we expect them to increase further but not much more than they have already, and we think that’s primarily because of the uncertainty surrounding a Trump administration and what it might mean for the housing market, that’s already been capitalized in the bond market,” he added.
“Why are interest rates on the rise, why is is fiscal expansionary policy causing bond markets to increase, why is the Fed raising short-term interest rates — it’s a belief of stronger economic growth moving forward,” opined Mark Fleming, chief economist at First American.
“The bond market is really scared,” noted Rodney Ramcharan, associate professor of public policy and research director at the University of Southern California’s Lusk Center for Real Estate. “Rates have just shot up in the last couple of weeks, the Fed on the short end is going to be acting — at the end of this year, we’ll see the second increase in the Fed rate, and depending on the talk in Washington I think the bond market is going to be key.”
In a post on Inman Coast to Coast asking whether agents were worried about the rate hike, a couple of readers agreed with the consensus from experts:
Didn’t rates already jump?
“We all expected [Federal Reserve Chair] Janet Yellen and the Fed to finally do another Fed funds rate increase in December, which may or may not have had a relatively large effect on mortgage rates,” noted Fleming. “They did that in December of last year and mortgage rates went down — the Fed pushing short-term rates up doesn’t necessarily automatically translate to higher mortgage rates, but it does put upward pressure on them.”
And based on that expectation, Fleming said, mortgage rates have already increased. “We got something like a 50 basis-point increase in mortgage rates based on expectations, as Yellen actually mentioned last month, of fiscal expansionary policy,” he said.
“That’s going to stay — we will probably have some sort of fiscal expansionary policy under the new Congress and administration, so we’re all busy as economists re-benchmarking what our mortgage rate forecast looks like for 2017,” Fleming added.
Where will mortgage rates go from here?
“We’ll see rates drift down a little bit through the end of the year, with the Fed having their meeting and making a policy change, which would be a reason for the market to back off, assuming they aren’t raising short-term rates aggressively and early next year,” stated Jonathan Smoke, chief economist for realtor.com.
“So that gives us room to say a 50-basis point increase from the end of the year through 2017 — if that’s the case, then I think it’s manageable,” he added.
“We just saw a pretty significant half a percent jump up, and that puts us well onto a trajectory that will continue through the rest of this year and into 2017,” noted Svenja Gudell, chief economist at Zillow.
“I think in December we’ll see the Fed raising rates — and we’ll see more Fed hikes in 2017, and with that I wouldn’t be surprised if the 30-year fixed mortgage rate hits 4.75 percent.”
“The era of ultra-low interest rates is over,” said National Association of Realtors chief economist, Lawrence Yun, in a statement. “Today’s short-term rate hike will be followed by several additional rounds of increases in 2017 and 2018.
“Despite these moves, mortgage rates will not rise alarmingly. By this time next year, expect the 30-year fixed rate to likely be in the 4.5 percent to 5 percent range,” Yun concluded.
“Mortgage rates remain near historic lows, although it may not seem that way to recent, first-time buyers and those considering a home purchase,” said Stephen Phillips, president of Berkshire Hathaway HomeServices, in a statement.
“Mortgage rates ticked up following the presidential election, and we may see rates rise a little more in response to anticipated Fed action. Still, I expect mortgage rates to remain low for the foreseeable future.”
What are buyers doing?
“To use what my English grandfather always used to tell me: Preserve calm — the markets will adjust,” said Fleming. “The adjustment process is quite natural. People adjust their bidding process — it’s not that they don’t buy, it’s that they buy less.”
At least one reader said that he had a worried buyer, though:
“In anticipation of the Fed’s actions today and due to the recent increase of mortgage rates, we’re seeing a lot of buyers in the market right now,” said Chris Heller, CEO, Keller Williams, in a statement.
“Regardless of Fed movements, homeownership remains one of the safest investment options for wealth building today because of the immense appreciation potential. And, a home remains a valuable hedge against inflation,” he added.
And according to another reader, although rates tell part of the story, they aren’t the most important thing her clients are worrying about right now.