As Christmas and the New Year approach, the Fed is continuing its strategy of gradual rate hikes on December 12, raising the benchmark interest rate 25 basis points to between 1.25% and 1.5% for short term lending consumer lending. And it’s likely that the Fed will continue to raise rates in 2018, with industry analysts projecting that rates will likely be raised three times over the coming year as long as labor markets and other economic indicators remain strong.
What’s the likely effect on mortgage rates?
First, it’s important to remember that Fed rates do not directly affect most fixed mortgage rates, which are tied to movements in the bond market. Rate hikes do directly lead to increased rates for credit cards, adjustable rate mortgages and home equity lines of credit. Therefore, the hikes could affect certain types of mortgages and housing related loans. But the most likely effect of these rate hikes is that they may slightly reduce household budgets and available income overall, which may cause borrowers to qualify for lower loan amounts.
It’s this effect – the lowering of household budgets – which would have the most direct impact on the housing market in 2018. And that’s the point of the series of rate hikes that the Fed has engaged in since 2015. While housing prices are rising and the economy is adding jobs, prices for other consumer goods have remained stagnant as consumers decline to spend on less durable purchases.
The rate hikes indicate the Fed’s efforts to bring housing prices in line with other economic indicators but thus far, the hikes have not budged the inflation rate. November inflation was reported at 1.7%, shy of the Fed’s goal inflation rate of 2%. The retail sector is of particular concern as the industry restructures from a brick-and-mortar business model to one where the majority of purchases are made online.
So, what’s the likely outlook for Arizona Real Estate?
Rising rates could put a slight damper on purchases and sales of new and existing homes. But that effect may be modest, given that rates are still significantly below their pre-recession levels. As the jobs market improves, more households will be forming, leading some industry watchers to believe that the effect overall for housing may still be one of rising home prices, as some would-be first time home buyers are forced to rent a while longer, driving up rents and values of investment properties.
As yet unknown, and perhaps a larger concern for housing than the Fed rate hikes, is the impact of the upcoming 2018 tax bill and its implications for the mortgage deduction tax credit and other tax policy that could directly impact housing. More on that in a future newsletter.
As always, we here at The Mortgage Brothers Team wish you and your family a Merry Christmas and Happy New Year!