FED Raises Interest Rates | Manhattan Beach Real Estate Values


Perhaps there were no surprises yesterday when the FOMC increased the benchmark rate by 25bps and has targeted the range of 0.25% to 0.50% for the overnight lending rate. The surprise might be that mortgage rates are lower today after the announcement. Why does the Fed raising the key interest rate actually cause mortgage rates to drop? And more importantly how will this affect Manhattan Beach Real Estate prices, home values, and buyers in the short and long term.
Let’s walk through the impact of raising interest rates. First and foremost is that the market expected the Fed to raise rates so the change yesterday was already priced into Treasury yields (and by association mortgage rates).

The movement in Treasury yields after yesterday’s announcement was almost zero. In fact almost every single market, commodities, high yield bonds, etc. were impacted very little. This morning the market opened to a stronger dollar (which is what happens when you reduce the supply of US dollars). Combine that with the fact that foreign economies around the world are struggling. Oil rich countries have seen the price of a barrel of oil drop from $61 in the summer to $35 today, and for most of those counties, a recession is sure to ensue very quickly. Therefore you have commodities and non-US dollar denominated assets are all taking a hit. That’s driving investors into US Treasuries for safety and yield that is backed by an appreciating US Dollar.Part two of this equation is short term versus long term rates. Short term rates are primarily driven by the Fed. Short term rates are usually identified as being less than 2yrs to maturity.

Long term rates have been very stable, which is a reflection of long term growth and inflation expectations being relatively unchanged. With oil and other commodity prices falling, expectations for inflation are below the Fed’s 2 percent target. The market views long term growth also to be relatively low and that is showing up in the 10yr yields. The market actually expects the Fed to raise rates only twice in 2016.

That’s a big disparity and should create some volatility as either the Fed, or the market, or both adjust to reality.In conclusion I would expect volatility in the first quarter of 2016. It really depends on how economic data from Q4 2015 and early 2016 looks along with how the entire economy adjusts to the new normal of a supposedly rising interest rate environment with low inflation and an appreciating dollar (and don’t forget about jobs). Each individually will have a dramatic impact on demand for Treasuries as well as the expectations for the Fed.

Now back to Real Estate.


Obviously this is going to affect people differently depending on their personal situation.In the short term, Sellers may well benefit as we go into the peak selling season and buyers try to lock in properties before rates go up further - and they will. I would also predict that many Buyers will substitute 7 and 10 year ARMS for fixed rate products. There will be some buyers who will be priced out of the market because they were already qualifying based on lower ARM rates. Also we are less likely to see the runaway price wars of the past few years. Here's why. When Buyers could offer $25K, $50K or even $100K over the asking price and their payment went up in the hundreds, people would do it in order to get the home they want and not chase the market up. With higher rates, we'll see less of that. And it is pretty doubtful that we'll see rates go up a point and property values go up another $100K. There's just not that much headroom.

If you will be buying in 2016, best to jump in before rates go up even more. The "deal" right now is getting into escrow. Even a quarter point jump could cost you tens of thousands extra over the course of your mortgage.If you are a home owner and not thinking of moving but have an adjustable rate mortgage, you might want to consider refinancing into a fixed rate even if it is higher in the short term. If you wait to refi, it may cost you in the long run.

Comments