The Federal Reserve finally raised rates for the first time this year at its December meeting and suggested there could be three more rate hikes next year. There are varied opinions about what this could mean for real estate, so let’s tackle it!
After threatening to do so for several months now, the central bank raised the key interest rate another quarter percent by a unanimous vote. The overnight lending rate between banks is now up to a half-percent from a quarter percent.
This marks the first rate hike in 2016, even though the Fed announced last December that it would raise rates four times this year.
Why did it take so long?
The Fed raises rates to slow down a booming economy and fend off inflation. Raising rates when the economy has not been booming is risky. Last December is a perfect example of this. That was the last time the Fed raised rates, and only by a meager .25 percent after nearly a decade of near-zero rates, and just a few weeks later, the stock market took a massive hit.
I was invited on Neil Cavuto’s “Your World” on Fox News in New York City shortly after the Fed raised rates last December to share my insights on how higher rates would affect real estate.
I told Neil that a Fed rate hike would not drive mortgage rates up because the Fed Fund rate is not directly related to mortgage rates. Instead, I predicted that mortgage rates would actually do the opposite because a Fed rate hike could be the prick the pops the stock market bubble. And that’s exactly what happened.
Will that happen again this January?
It’s hard to predict nearly anything these days because the market is so manipulated by the Fed. Ten years of near-zero interest rates and trillions of dollars of quantitative easing has certainly fueled the economy, but not in a healthy way.
It’s like the feeling you have when your house goes up in value so you go to the bank and get an equity line. Suddenly you feel rich! You have lots of cash to spend, but fail to realize it was borrowed and has to be paid back someday. If you borrowed the money at 0 percent interest, and then suddenly the interest rates increase, it could be tough to pay it back.
That’s the situation many corporations face today. Many borrowed cheap money to buy back their own stocks, but even a quarter percent rate hike can affect profits, which spooks stock market investors.
President-elect Donald Trump admitted several times on the campaign trail that the economy was sluggish and that the stock market was inflated. How can the stock market be inflated if the economy is stalling? Simple – fake money fueled it, not genuine economic growth.
That’s why it’s frightening to see how an already inflated stock market could be on such a tear – reaching record new heights – simply as a result of the election. Investors turned bullish immediately after Trump’s victory and have been frenzied every since – basing their optimism on the new administration’s plans for tax cuts, fewer regulations and increased infrastructure spending.
All this excitement will end when reality sets in and people realize that our problems have not disappeared just because a new president has made some Reagan-esque promises. Things don’t move quickly on Capitol Hill, even with a Republican Congress. Besides, the Reagan era faced very different issues than we have today, so using the same methods may not work.
So, let’s get back to real estate
The Fed raises rates if the economy is growing too quickly and needs to put on the brakes in order to curb inflation. That is definitely not the case today. Our economy is struggling to fight deflation, not inflation. That’s why trillions of dollars were pumped into the money supply through quantitative easing. There would be no need for such massive stimulus if we were fighting inflation.
When the Fed raises rates in a weak economy as it just did, it could cause a slowdown in an already slow economy – and more than likely we’d soon see a repeat of last year’s stock market collapse.
Optimism over Trump’s inauguration on Jan. 21st could keep Wall Street investors pumped up for a bit longer than it did last year. But when reality hits, everything could reverse — and reverse quickly. When it does, investors will likely jump back into the safety of bonds – just as they did last year. That would likely reduce mortgage rates, because they are closely tied to bond yields.
Lawrence Yun, chief economist of The National Association of Realtors, said that the era of ultra-low interest rates is over. But he also added that despite the current rate hike and any rate hikes next year, “mortgage rates will not rise alarmingly.” Curt Long at NAFCU said: “The impact of a quarter point rate hike on U.S. households should be minimal.”
Right now, the euphoria on Wall Street has investors dumping bonds and jumping into stocks, which has driven the bond yields up. Mortgage backed securities, which are closely tied to bond yields, also increased. That’s why mortgage rates bumped up from an average 3.47 percent in late October to 4.16 percent at the beginning of December – a little more than two-thirds of a percent!
What does this mean for real estate investors?
If you have an adjustable rate mortgage, you could see your rates tick up slightly.
If you are trying to qualify for a loan, your payment will be slightly higher.
If you have a fixed-rate loan, you won’t notice a thing.
If you’re a flipper, you may have a bit more trouble getting your buyer qualified for a loan.
Redfin says the average monthly payment on a $268,000 home with a 20-percent down payment and a 3.47 percent interest rate would be $1,280. If you raise that rate to 4.16 percent, the monthly payment jumps $86 a month.
Yun is predicting that by this time next year, the 30-year fixed rate would be in the 4.5 percent to 5 percent range.” Redfin is forecasting a slightly lower rate of 4.3 percent. I’m predicting less than that – below 4 percent.
Redfin Chief Economist Nela Richardson explains that mortgage rates will remain low because the Federal Reserve plans to continue investing in mortgage securities. It began doing that in the aftermath of the housing crisis, as part of its quantitative easing strategy. She says those mortgage securities provide a constant supply of credit for lenders and that will keep mortgage rates low.
She says: “As long as the Fed remains a trillion-dollar investor in the U.S. mortgage system, a moderate pickup in short-term rates won’t unhinge historically low long-term rates like mortgage rates, and won’t dampen the strong home-buying demand we’ve seen as a result of the strengthening economy.”
But remember, rates are still extremely low. When I started buying real estate, rates were in the 9 percent range. Back in the ’80s, they were above 15 percent!
The bottom line:
- Interest rates are not likely to soar anytime soon, so don’t worry about it affecting real estate values, except in certain markets that are already unaffordable. Also, it’s important to be aware of which markets are affected by stock market fluctuations. You can get a list of solid real estate markets that withstand stock market corrections at RealWealthNetwork.com
- If you find a property that makes sense with today’s rates, lock it up. That way, if rates increase, you’re set. If rates decrease, you can refinance. You can get a list of lenders who specialize in real estate investment loans at RealWealthNetwork.com
About the Author
Kathy Fettke is the founder and co-CEO of Real Wealth Network, a passive real estate investing club with more than 24,000 members. She’s also the author of “Retire Rich with Rentals” and host of “The Real Wealth Show,” a featured podcast on iTunes with listeners in 27 different countries. Kathy is passionate about understanding real estate cycles so she and her members can invest in the best markets and best deals available today. She is frequently invited to share her expertise on CNN, CNBC, Fox News, NPR, CBS MarketWatch and in the Wall Street Journal. Kathy received her BA in Broadcast Communications from San Francisco State University and worked in the newsrooms of CNN, FOX, CTV and ABC-7. She’s past-president of American Women in Radio & Television. Kathy loves the freedom that real estate investing can bring. She lives in Malibu, California, with her husband and two daughters and enjoys traveling, hiking, rock climbing, skiing, figure skating and surfing.