Fed Sees Housing Improvement & Raises Rates

By Ryan Dosen

 

The Federal Reserve announced earlier this week that it is raising its key short-term interest rate for the first time in over 10 years. Amid the financial crisis of the late 2000s, the Fed dropped its key rate to zero. The rate has stayed at zero since 2008 as we have waited for our economy to return to normalcy. Now that the Great Recession is past, unemployment is down, and the economy has improved, we will be seeing “gradual” interest rate increases. The rate increases are a sign that the Fed believes in the realness of the recovery; but the fact that the increases will be “gradual” confirms the delicate nature of our improving economy.

 

The Federal Funds Rate

The Fed sets the federal funds rate, which is the interest rate at which a depository institution lends funds maintained at the Federal Reserve to another depository institution overnight. The target federal funds rate has been set at 0 to ¼ percent for many years, but the target rate is now being bumped up to ¼ to ½ percent. As the cost of borrowing money between banks increases, the interest rates that consumers have to pay banks for loans generally follows suit.

Fed Chairwoman Janet Yellen says that “only gradual increases” in the federal funds rate are expected. According to Bloomberg Business, the vote for rate hikes was unanimous and Fed policy makers are implying four ¼ point increases in the target range next year.

 

The Fed’s View on the Economy

Yellen says that “the economic recovery has clearly come a long way, although it is not yet complete.” She added that “the committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will continue to expand at a moderate pace and labor market indicators will continue to strengthen.”

The Fed’s official press release tells us that “economic activity has been expanding at a moderate pace,” “household spending and business fixed investment have been increasing at solid rates, and the housing sector has improved further….” We are also told that “a range of recent labor market indicators, including ongoing job gains and declining unemployment, shows further improvement and confirms that underutilization of labor resources has diminished appreciably since early this year.” Basically, more people are working and fewer of those working are underemployed.

 

What a Rate Hike Means for Real Estate

Lawrence Yun, chief economist for the National Association of Realtors (NAR), says that he doesn’t expect the slight increase in rates to have a big effect on borrowing next year. He says that the announcement of small increases “provides a signal that the economy is strengthening,” and to that extent it could actually serve as a stimulant to the economy. Wall Street took note and stocks shot up in response to the Fed’s announcement.

Rates are at historic lows, and the Fed’s signal for rate increases officially puts potential homebuyers on notice that rates are likely only going up from here. For those that have been waiting to make the jump into homeownership, they need to know that the cost of borrowing is likely the lowest that they will see for the foreseeable future.

 

– Ryan Dosen manages The Wayne Megill Real Estate Team of Keller Williams – Brandywine Valley in West Chester, PA. Contact Ryan Dosen to inquire about buyer or seller representation or to learn more about a career in real estate by emailing ryan@waynemegillteam.com or calling 610-399-0338.

This article was published by 21st Century Media and the Daily Local News (West Chester, PA). To read this article on the the newspaper’s site, please visit the Daily Local News.

Check out Ryan Dosen’s other 21st Century Media real estate columns.