The Federal Reserve Board and pundits started hinting at two more rate hikes this year well ahead of the March rate increase. The central bank is still trying to make up for lost time from the 2007-2008 financial crisis, during which we saw record-low interest rates as the U.S. economy teetered on the brink of depression and recession countless times.
The economic impact of a rate increase is, of course, tied to market reaction to the news and consumer’s reaction to the market.
With the current tense political environment, it is difficult to predict whether the rate increase would generate a lasting bubble that could bring the economy to a grinding halt, or whether it would not have a negative impact at all. Let’s take a look first at how the market reacted in the short-term to the March rate increase.
In March, the Feb did as expected in a still-strong economy – it raised rates to a range between 0.75 and 1 percent. This was a huge step back from the crutch it has been holding under the American economy for nine years. The economic stimulus packages seemed to no longer be needed, and the market merely nodded with no noticeable reaction beyond the first blip when interest rate rose.
With the June increase, home costs are predicted to rise at their slowest rate in six years due to the decrease in housing affordability, which is an industry measure based on housing prices and overall income. It is expected to hit its lowest point since the end of the recess, according to Fox Business.
This may hurt positive margins within national homebuilders, for example, Lennar Corp and PulteGroup Inc. However, a gain in volumes as purchasers gradually come back to the market is relied upon to balance losses.
Consumer confidence has remained high, partially due to the flurry of activity in the Trump White House. As of March, people were still expecting lower taxes, more jobs, and the end of Obamacare and its effects on employer healthcare costs. Let’s examine Janet Yellen’s reaction in March.
“The data have not notably strengthened,” Yellen said. “We haven’t changed the outlook. We think we’re moving on the same course we’ve been on.”
This was interpreted as a suggestion that the economy was expected to continue growing, although not robustly. Economy magazine noted that the Fed so far is on task with its primary going of maximizing job growth and keeping inflation at acceptable rates, usually benchmarked at 2 percent. Anything under that will not generate price increases that stir the economy.
Consumer psychology will play a large part in how the housing market weathers rate increases. Right now, there are tons of potential buyers that never experienced rate increases and who enjoyed low loan costs. They have already begun buying more homes. That volume offsets lower margins for lenders and builders in the short to mid-term outlook.
The 25 basis points of the March hike were well within predictable levels. It matched what industry analysts said would happen. We may not see a rise in loan rates right away, and a steep rise is so far not expected across the board.
A June rate increase is likely, sure. However, much depends on how consumers are feeling in terms confidence in an expanding economy, and a lot of that will be focused on the Trump presidency. Congress votes on the future of healthcare, as the Trump team tries to cobble together a replacement for Obamacare as well as propel the economy forward with tax cuts and deficit reductions.
So, for now, motivated buyers will keep purchases up as they try to beat the rate increase. Relaxed lending standards and lower loan fees will be used to mitigate the lower margins driven by the Fed increases. Meaning, in the short term, more loans will be generated. Ironically, this could be the strongest spring housing seasons in years.
Regards,
Ethan Warrick
Editor
Wealth Authority
