{"id":3441,"date":"2018-03-29T10:02:55","date_gmt":"2018-03-29T14:02:55","guid":{"rendered":"http:\/\/dankrell.com\/blog\/?p=3441"},"modified":"2019-07-16T06:53:24","modified_gmt":"2019-07-16T10:53:24","slug":"interest-rate-increase-dont-panic","status":"publish","type":"post","link":"https:\/\/dankrell.com\/blog\/2018\/03\/29\/interest-rate-increase-dont-panic\/","title":{"rendered":"Interest rate increase – Don’t panic"},"content":{"rendered":"\n
\"interest<\/a>
45 years of mortgage interest rates<\/figcaption><\/figure><\/div>\n\n\n\n

Last week, the Federal Open Market Committee<\/a> (FOMC) decided to raise the federal funds rate. The federal funds rate is the interest rate that is charged to banks for borrowing overnight funds to maintain the required target funds. Although the Fed interest rate increase means that a banks\u2019 business is getting more expensive, it doesn\u2019t necessarily mean that mortgage interest rates increase in kind<\/strong>.<\/p>\n\n\n\n

If mortgage rates are not always affected by the Fed\u2019s interest rate increase, then what is?<\/p>\n\n\n\n

Katherine Reynolds Lewis pointed out that the FOMC\u2019s interest rate hike indirectly influences jobs, wages, prices of the things we buy, and other items (7 ways the Fed\u2019s decisions on interest rates affect you<\/em><\/a>; bankrate.com; March 20, 2018). She states, \u201cSometimes mortgage rates go up when the Fed increases short-term rates, as the central bank\u2019s action sets the tone for most other interest rates. But sometimes mortgage rates fall after the Fed raises the federal funds rate<\/em>.\u201d An example of this is the seventeen rate increases during 2004-2005 when mortgage interest rates initially dropped, then slightly increased a year later. And most recently, the three Fed rate increases during 2017 when mortgage interest rates remained stable.<\/p>\n\n\n\n

The reason why a FOMC interest rate increase doesn\u2019t always affect mortgage interest rates is because mortgage interest rates are tied to the bond market<\/a>. The bond market is typically a bellwether of the economy. It is highly likely that the bond market baked in last week\u2019s Fed\u2019s rate increase prior to the FOMC announcement. Bond yields have already been increasing due to an improving economy, which pushed mortgage rates higher in recent weeks.<\/p>\n\n\n\n

In fact, the Freddie Mac Press release the day after the Fed\u2019s announcement indicated that mortgage rates increased one basis point (freddiemac.com; March 22, 2018):<\/p>\n\n\n\n

“The Fed\u2019s decision to raise interest rates by a quarter of a percentage point puts the federal funds rate at its highest level since 2008. The decision, while widely expected, sent the yield on the benchmark 10-year Treasury soaring. Following Treasurys (sic), mortgage rates shrugged off last week\u2019s drop and continued their upward march. The U.S. weekly average 30-year fixed mortgage rate rose 1 basis point to 4.45 percent in this week\u2019s survey.”<\/p><\/blockquote>\n\n\n\n

Immediately following the Fed\u2019s interest rate increase, NAR\u2019s chief economist, Lawrence Yun, stated<\/a> \u201cWe are in the middle innings of monetary policy normalization<\/em> (nar.realtor, March 21, 2018).\u201d Yun believes that the labor market is pushing the Fed to act to stave off inflation. He stated that consumers should expect more rate increases throughout 2018. However, he believes that increased new construction can belay future Fed rate increases:<\/p>\n\n\n\n

“Housing costs are also rising solidly and contributing to faster inflation. The one thing that could slow the pace of rate increases would be to tame housing costs through an increased supply of new homes. Not only will more home construction lead to a slower pace of rate hikes, it will also lead to faster economic growth. Let\u2019s put greater focus on boosting home construction.”<\/em><\/p><\/blockquote>\n\n\n\n

Yun\u2019s call to home builders to increase housing stock is preaching to the choir. The housing market\u2019s tight sale inventory<\/a> should already be spurring home builders to crank out new homes. But there are challenges. The latest new construction statistics<\/a> released by the US Census (census.gov) indicated that building permits issued during February were 5.7 percent lower than January\u2019s permits, but 6.5 percent higher than last February.<\/p>\n\n\n\n

By Dan Krell
Copyright \u00a9 2018<\/p>\n\n\n\n

Original published at https:\/\/dankrell.com\/blog\/2018\/03\/29\/interest-rate-increase-dont-panic\/<\/p>\n\n\n\n

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Disclaimer<\/a>. This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice. Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction. Using this article without permission is a violation of copyright laws.<\/p>\n","protected":false},"excerpt":{"rendered":"

Last week, the Federal Open Market Committee (FOMC) decided to raise the federal funds rate. The federal funds rate is the interest rate that is charged to banks for borrowing overnight funds to maintain the required target funds. Although the Fed interest rate increase means that a banks\u2019 business is getting more expensive, it doesn\u2019t … <\/p>\n

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