Well, it finally happened.
On December 13, 2016, the U.S. Federal Reserve announced a 25-basis-point hike in its benchmark federal funds rate and indicated that it expects three further increases in the coming year. It was a decision long-expected. After all, it had been a full year since the Fed’s previous rise of a quarter point. But, like any interest rate hike, the decision was made after much consideration. Whenever the Fed hikes interest rates, there’s always the fear that it will throw the economy, and especially the fragile housing market, into a tailspin.
The Interest Rate Hike Should Have Minimal Impact
The good news is that the effect should be minimal to those in the business of buying and selling homes. “We’ve been prepared for this for some time,” quoted President Steve Udelson of Owners.com, an online brokerage that helps people buy and sell homes themselves.
The general consensus is that gradual rate increases by the Fed are unlikely to be a huge game changer.
The reality is, most people involved in the housing market have been preparing for the inevitable increase for some time. “This interest rate hike has been widely expected, so most consumer interest rates have already climbed in anticipation,” says Matt Shapiro, a financial planner with LearnVest Planning Services.
Mortgage rates have been rising in recent months in part because of the likelihood of the rate hike and consumers (homeowners) expected it. Proof of this is that home refinancing originations rose 16 percent in the third quarter year-over-year—a clear sign that many people felt a rate hike was coming and prepared for it ahead of time.
Mortgage Rates Will Rise, but the Market Is Still Strong
While the Fed doesn’t directly control consumer interest rates, their recent interest rate hike will definitely move mortgage rates upward from November’s 30-year fixed rate of 3.6% commonly available on many websites. “We anticipate that rates may be 4-5 percent by the end of 2017,” said Lawrence Yun, chief economist for the National Association of Realtors (NAR) “and that home prices will also march upward by 4 percent.”
The good news for homebuyers (and investors) is that the market is still strong. In fact, many experts like Yun expect 2017 to be a decent year, with home sales at least matching 2016. Any impact from the rising interest rates will be felt the most by first-time home buyers, who previously rented. For two-thirds of existing households, the rate hike means “absolutely nothing” as their homes are tied to a fixed 30-year mortgage.
The Fed’s Hike Is a Sign of a Growing Economy
Economists generally agree with Fed chairperson Janet Yellen’s interpretation of their recent interest rate hike as a reflection of an improved economy. Housing and retail sales are strong. Household income is rising, allowing more people the opportunity to buy. Currently, at 4.6 percent, unemployment is at its lowest rate in almost 10 years and consumer confidence is up. These both are positive signs for the real estate industry.
Then, there’s the impact of Donald Trump’s proposed economic program of tax cuts, deregulation, and increased infrastructure spending. The Fed officials attributed the surge in stock prices, the increase in bond rates, and the stronger dollar following the election to enthusiasm among investors about President-elect Trump’s plans to bolster economic growth.
Lending Standards May Be Relaxed
From a real estate investor point of view, the interest rate hike could be very beneficial in both increased availability of properties and in an easing of lending requirements. While the hike will help home sellers see a price increase for their home, this could be a good thing for investors as it could prompt more homeowners to put their properties up for sale in what has become an increasingly under-supplied market.
But, the hike is also favored by banks and other lenders. As NAR’s Yun explained, “They may open up the lending box and relax their standards, which were excessively tight before”. And, there may even be more new lenders now entering the market.
Interest Rates Are Still Low, Relatively Speaking
We all need to keep a healthy perspective of the Fed’s recent rate hike (to .75 percent) as it relates to recent history. If you were around in the mid-to-late 80’s and borrowed money to purchase real estate, you undoubtedly remember much higher interest rates. At that time, mortgage rates hovered close to 10 percent! And, in the early 80’s, it was in the teens! As recently as December 2006, before the height of the recession, the Fed rate was above 5 percent.
Strong Credit is Still Key to Keeping Your Borrowing Interest Rates Low
At RVA Property Solutions, we always say having a credit score that lenders will love is one of the 10 tips for successful real estate investing. And, nothing has changed with this recent rate hike. Having a strong credit score is still the larger determinant of what type of interest rate you might pay a lender. As an investor, it’s still your credit score (and not the Fed rate) that will ultimately determine the interest rate you pay for borrowing money.
So, focus instead (as you may be already) on keeping your credit healthy by making on-time payments, keeping your total debt low, and making other credit-strengthening moves. Doing this will reward you long-term as you pursue your real estate investing career.
Contact us to discuss getting started in real estate investing, especially in the Chesterfield, Henrico, or Greater Richmond area.