Since the financial crisis of 2008, the Federal Reserve has been quite reserved when it comes to raising its benchmark interest rate. However, last week, the rate was raised once again, marking the second increase in three months. There are reasons for this, and while it’s not expected to have a tremendous impact on the housing market today, it could impact some buyers. Here’s what you need to know.
Why Did the Fed Raise Benchmark Rates Again?
Many people want to know why the Federal Reserve raised its benchmark interest rates in the first place. After all, while the Fed doesn’t directly determine the rates you’ll pay when you obtain a mortgage, it does have some impact on those rates. Per Janet Yellen, the chairwoman of the Federal Reserve, improvements in the American economy leading to inflation led to the rate hike. What’s more, the Federal Reserve put a nine-year stimulus plan into effect after the financial crisis of 2008, and this most recent rate hike simply signifies the end of that stimulus.
How Large was the Rate Hike?
This most recent increase in benchmark rates took them a quarter point higher. While that may not seem like much, this is the second quarter-point increase, leading to a total of half a point, in the last three months alone. As stocks and bonds continue to grow in popularity, and as employers continue to hire, and people continue to consume, the rate hike is thought to “match” economic growth. However, Yellen says the Fed is not as optimistic as these analysts and it believes the economy is growing more slowly than many believe. Thus, it’s expected that the Fed will initiate a series of very small rate hikes rather than one very significant increase.
How Will the Rate Hike Affect the Real Estate Market?
While it’s true that the Fed doesn’t directly determine the interest rates you’ll receive when you take out a mortgage, it does set a very solid standard for lenders, who tend to follow the Fed’s lead. Because of this, homebuyers – whether first time or otherwise – will see interest rates increasing now and into the future. Those who have strong credit will likely see only very slight increases, but those who have challenged credit may see differences of several hundred dollars annually. Those who are planning to buy should do so promptly to lock in these lower rates.
The Future of the Federal Benchmark
Yellen said the Federal Reserve is still anticipating another three moves, which means there are increases yet to come. Market experts anticipate the next increase to come sometime in June, and perhaps another in December. The increases will likely follow the same quarter-point trend, as well. Right now, the federal funds rate is 1%, up from 0% this time last year and 0.5% as of the Fed’s first rate hike since 2008 in December 2016. It’s expected that this rate will increase to 1.5% by the end of 2017, which will have an impact on prime lending rates and ARMs.
Although the increase in the Federal Reserve benchmark interest rate has people across the country concerned about the future of real estate, the truth is that a 1.5% increase over the course of 12 months isn’t as significant as it may seem. Fixed-rate mortgages will see only slight interest increases, but those who have adjustable rates may feel more of an impact.