As winter officially began and 2015 came to a close, the Fed resolved to raise its benchmark Federal Funds Rate. In other news, housing starts heated up while home sales went into hibernation.
Fed Warms Up to Rate Increase In December, the Federal Open Market Committee raised its benchmark Federal Funds Rate for the first time in almost a decade. This is the rate at which banks lend money to each other overnight. It had been near zero to support economic recovery from the worst financial crisis and recession since the Great Depression.
What does this mean for consumers?
The Fed Funds Rate increase is not directly tied to long-term rates on consumer products, like purchase or refinance home loans. So, consumers should not expect home loan rates to rise as a direct result of the Fed’s decision. That being said, consumers will be impacted in two ways.
First, short-term interest rate loans will increase on credit cards, home equity lines of credit, auto and business loans.
Second, improving economic factors may influence home loan rates. The Fed’s rate increase was based on signs of a strengthening economy. If the economy continues to improve, home loan rates could move higher. Why? Because home loan rates are based on Mortgage Backed Securities, which are a type of Bond. Weak economic news normally causes money to flow out of higher risk investments like Stocks and into less risky investments like Bonds, causing Bond prices and home loan rates to improve. Strong economic news normally has the opposite result.
The Latest in Housing News November Housing Starts rose 10.5 percent from October, according to the Commerce Department. This was above expectations, and the jump nearly erased the 12 percent decline from September to October. After months of significantly higher multifamily unit home starts, single-family home starts were up to the highest level since January 2008.
Although below expectations, November New Home Sales were up 4.3 percent from October, according to the Census Bureau.
In contrast, Existing Home Sales fell 10.5 percent in November from October. It was the sharpest monthly decline since July 2010. New home loan regulations, affordability and lower housing inventories were blamed for the decline.
As economic news unfolds in the months ahead, I’ll continue to monitor the headlines. If you have any questions about home loan rates, loan products or the housing market, please don’t hesitate to contact me.
This article was taken from my January 2016 issue of YOU Magazine. Click here to view the full newsletter.