The Fed Does It Again

12/15/2016

It was one year ago this month that the Fed changed policy and increased short-term interest rates by 25 basis points. Since then, we’ve been reading between the lines of every speech given by Janet Yellen, the Chair of the Federal Reserve, and over-analyzing each new piece of data to help us determine when the next hike would be. Well, the wait is over. Today the Fed did what we expected: they raised short-term interest rates to a range of 0.5%-0.75% from 0.25%-0.5%. Our Manager of Housing Economics, Ali Wolf, lays out what you need to know below.

Projection of three hikes for next year.
Consensus before today’s release was two rate hikes in 2017. The Fed is now predicting they will raise rates three times. The projections also call for three rate hikes in 2018 and 2019. Remember, last December when the Fed raised rates, they had called for four hikes in 2016.

Rising short-term rates impact mortgage rates.
Short-term rates aren’t the same as mortgage rates, but the former will filter into the latter. We did a basic calculation assuming 20% down and the median national new home price of $304,500 to see how the payment will change as mortgage rates move from 4.0%. If mortgage rates move from 4.0% to 4.5%, the average new home will cost $71 more per month. If rates move from 4.0% to 6.0%, monthly mortgage payment will increase by nearly $300 a month. The payment change is more exaggerated in higher cost metros and vice versa.

Fed confident in economy.
Part of the reason the Fed did not raise rates in June was because of the uncertainty surrounding Brexit. Undoubtedly, we are still in uncertain times. However, the Fed has made it very clear that they are data dependent, and the economic figures show a healthy and improving economy. Looking forward, they adjusted their unemployment projection to 4.5% from 4.6%.

Predicting Fed policy has proven to be challenging, even for the Board of Governors themselves. Even though the Fed is anticipating three hikes next year, analysts are calling anywhere from one to three in 2017. If the Fed raises by .25% each time, we could see rates closer to 5.0% by the end of next year; 5.0% is still below the 43 year historical average of 8.4%. In an environment where rates and home prices are increasing, a subsequent decrease in affordability will be something our industry needs to keep an eye on going forward.

Contact us to discuss how we can help you navigate in this rising rate environment.

Ali Wolf, Manager – Housing Economics
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