What affect will the FED's decision have on housing?

Photo credit: Bryan Davis

What affect will the FED's decision have on housing?

Topics: Finance, Residential Real Estate

Markets: Statewide

Much has been made about the Federal Reserve's decision to raise the Federal Fund Rate last Wednesday. 

It was the first rate hike in one year, and it was just the second time the key rate has been raised in the past decade. 

Markets watched and listened closely to what Federal Reserve Chairwoman Janet Yellen had to say after the Federal Open Market Committee met for the final time in 2017 on Wednesday. 

While what the Federal Reserve says about the state of the U.S. and global economy has some affect on mortgage rates, those rates are not set or determined by the FOMC. 

"The last time I really remember being seriously worried about the Fed was when Paul Volker was chairman thirty-something years ago, in the early Regan time," said Jim Dye, senior vice president at RealtySouth. "He was going to crush inflation no matter what, and he raised those rates and ran inflation out the market."

While the Federal Fund Rate, which is set by the FOMC, stayed at near zero for a decade, mortgage rates have typically been higher. For example, rates were hovering near 4 percent just prior to the Fed's meeting last week. 

"The mortgage rate is really a function of Wall Street and what people pay for mortgage-backed securities and what’s the market for that," Dye said. "It might have social effects, with people’s confidence and expectations, but there’s not a direct correlation where if you move this, then this changes over here."

According to a report by The Morgage Reports, the Fed Funds Rate and the average 30-year fixed mortgage rate have differed by as much as 5.25 percent and as little as 0.50 percent over the past two decades. 

"I liken it to a stool with three legs," Dye said. "You’ve got mortgage rates that are kind of important. You’ve got consumer confidence which is kind of important, and you’ve got the jobs picture. If you take out one of those legs, your stool falls."

The Federal Reserve does not set mortgage rates, but its comments regarding the economy do have an effect on residential housing. For instance, if the Federal Reserve has an overall optimistic view of the economy, mortage rates tend to rise. When the Fed speaks about inflation running high, that means the buying power of the dollar, and thus the value of mortage bonds decrease, which could lead to higher interest rates. 

Yellen's assessment of the economy was largely positive on Wednesday, but the overall outlook remained uncertain moving forward. 

"Of course, the economic outlook is highly uncertain, and participants will adjust their assessments of the appropriate path for the federal funds rate in response to changes to the Page 4 of 20 economic outlook and associated risks," Yellen said in a post-FOMC meeting press conference. "As many observers have noted, changes in fiscal policy or other economic policies could potentially affect the economic outlook. Of course, it is far too early to know how these policies will unfold. Moreover, changes in fiscal policy are only one of the many factors that can influence the outlook and the appropriate course of monetary policy. In making our policy decisions, we will continue--as always--to assess economic conditions relative to our objectives of maximum employment and 2 percent inflation. As I have noted on previous occasions, policy is not on a pre-set course."

On inflation, Yellen noted the expectation was for inflation to rise to 2 percent over the next 24 months, but the current state of growth is still short of the 2 percent goal of the Fed. 

"Turning to inflation, the 12-month change in the price index for personal consumption expenditures was nearly 1-1/2 percent in October, still short of our 2 percent objective but up more than a percentage point from a year earlier," Yellen said. "Core inflation--which excludes energy and food prices that tend to be more volatile than other prices--has risen to 1-3/4 percent. As the transitory influences of earlier declines in energy prices and prices of imports continue to fade, and as the job market strengthens further, we expect overall inflation to rise to 2 percent over the next couple of years. Our inflation outlook rests importantly on our judgment that longer-run inflation expectations remain reasonably well anchored. Market-based measures of inflation compensation have moved up considerably but are still low. Survey-based measures of longerrun inflation expectations are, on balance, little changed. Of course, we remain committed to our 2 percent inflation objective and will continue to carefully monitor actual and expected progress toward this goal." 

Meanwhile, Dye said inventory could pose more of a problem long term than rising mortgage rates. 

"If mortgage rates rise, I don't think that's going ot be that big of a deal," Dye said. "Inventory is the biggest problem, particularly in the higher-end markets." 

Dye said it could take until 2018 before the market supply begins to catch up with demand, largely due to changes in regulations and other policies from the new presidential administration, which could take a while to take hold. 

"When this thing catches up, we could have a really good market, but I don’t’ expect things will change that much, that fast in the next 18 months," Dye said. "It usually takes a little time for an incoming administration’s policies (to take hold)."


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