Following months of speculation, The Federal Reserve will raise rates for the first time in a decade in December. This article from Andrea Riquier of MarketWatch highlights some of the reasons why the higher rates will have little affect on the increasing demand for homes.
While most economists – and Fed officials – believe the overall economy is strong enough to weather a small interest rate rise, there’s still some concern about specific sectors, like housing.
Friday’s jobs report made it all but official. The central bank will raise rates for the first time in a decade at its December policy meeting, to be held in two weeks.
But analysts say this time is different.
“We think that the fact that they’re ready is a reflection of an improving domestic economy” said Lynn Fisher, vice president of research and economics with the Mortgage Bankers Association. The jobless rate is at a 7-year low and wage growth is starting to heat up, Fisher pointed out. Both will buoy demand.
Even after Fed “liftoff” in December and a second increase in the second quarter, MBA expects mortgage originations to rise 10% and forecasts a 15% jump in housing starts in 2016.
Steve East, chief economist and market strategist for Height Securities, is also buckled in for liftoff in December. But East doesn’t think the Fed’s moves will have much impact on the broader rate market. “It’s more clear that the Fed is going to raise rates than that the long end is going to go up because presumably some rate hike cycle is priced in,” East said.
Even if the Fed’s actions do hit the mortgage market, East said, “I don’t think a 25 basis point increase in mortgage rates is going to make a difference in demand.”
Consumers seem to agree. When online brokerage Redfin conducted a survey in September, only 5% of respondents called rising rates a concern. And that same survey showed that demand hadn’t let up at all: rising house prices and competition from other buyers were the two biggest concerns.
Just as the bond market has priced in some of the Fed’s expected increases, consumers are doing the same, said Redfin Chief Economist Nela Richardson. It’s “embedded in the consumer mindset,” she said. “They know about rates. They also understand in a very savvy way that rates aren’t expected to rise quickly.”
