Interest Rate Hike Looms on the Horizon

Interest Rate Hike Looms on the Horizon

It appears as if the time has finally come. For the first time since June of 2006, the Federal Reserve appears primed to raise interest rates. While it is not a guarantee that the Fed will raise rates, there are strong indications that they will. This speculation is leading many to wonder if this is the right time to do so, and what the economic ramifications will be across various industries, particularly real estate.

Federal Reserve of New York
Photo Courtesy Michael Daddino

Why Now?

For nearly a decade, the Fed has kept its benchmark interest rate between 0 and 0.25%. That was in the midst of the longest recession since World War II. The move created a buyers market intended to stimulate economic growth that the rapidly declining economy desperately needed. However, things are different now, or at least the Fed hopes it is.

Since March, Fed officials have stated that they anticipate raising interest rates before year’s end. The common theme in statements from officials supporting a rate raise has been the sustained economic rebound, robust employment statistics, and combating inflation.  Jeffrey M. Lacker, a member of the Federal Open Market spoke about his fear of inflation in September:

“Some might argue that as long as inflation is close to 2 percent we have a free pass — we can keep supporting the real side of the economy with low rates until inflation rises. But if, as I’ve argued, the real side of the economy calls for a higher interest rate, then there is a real danger associated with this strategy. Inflation is a lagging indicator, and the forces that lead to rising inflation can build up before they are apparent in the data.”

Perhaps even more significant were the words of William Dudley, the president of New York’s Federal Reserve Bank. Dudley stated as recently as November that, regarding interest rates, he sees “… the risks right now of moving too quickly versus moving too slowly as nearly balanced.”

What this Means for Real Estate

Interest rates have been so incredibly low the past decade many don’t even remember what it’s like to pay typical rates in the 6-8% range. Unfortunately, for a housing market that is still not fully recovered from the recession, a return to those “normal” rates could cause some major problems amongst both home buyers and those looking to sell their homes.

Higher interest rates on mortgage loans decreases purchasing power for those looking to buy a new home. This obviously goes hand in hand with increasing the difficult of selling a house, as those looking to buy a new home will be more likely to sit on their hands instead of taking action.

Conclusion

If the Federal Reserve does decide to raise the interest rate this year, they are most likely to do so on December 16th when the policy making group that decides on the target rate concludes its two day meeting. The next meeting scheduled after that occurs January 26-27 and March 15-16.

Whether the rates are raised six days from now or further out, it’s clear that time is running out for people hoping to sell their homes with the fewest barriers possible.