The Federal Reserve made the long-awaited, much-anticipated announcement on Wednesday afternoon that federal funds target rate will increase by 25 basis points from its near-zero level where it has been since 2006.
The announcement came as the Fed wrapped its eighth and final Federal Open Market Committee (FOMC) meeting of 2015 on Wednesday afternoon. The vote was unanimous.
“The Committee judges that there has been considerable improvement in labor market conditions this year, and it is reasonably confident that inflation will rise, over the medium term, to its 2 percent objective,” the FOMC said in its statement Wednesday. “Given the economic outlook, and recognizing the time it takes for policy actions to affect future economic outcomes, the Committee decided to raise the target range for the federal funds rate to 1/4 to 1/2 percent. The stance of monetary policy remains accommodative after this increase, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation.”
After a widely-expected rate increase did not happen at the September FOMC meeting, the Fed stated that “In determining how long to maintain this target range, the Committee will assess progress—both realized and expected—toward its objectives of maximum employment and 2 percent inflation.” Another FOMC meeting came and went in October, albeit with much less fanfare than the September meeting, without the Committee raising the federal funds target rate.
The Fed’s decision to raise short-term interest rates took into account, “a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.” In what many analysts and economists saw as the final piece of the puzzle, the November employment summary released by the Bureau of Labor Statistics in early December reported 211,000 jobs added in November, an unemployment rate of 5.0 percent, and an average monthly job gain of 218,000 for the three-month period from September to November.
“I applaud the Federal Reserve for making the long overdue decision to raise the federal funds rate,” said Ed Delgado, Five Star Institute President and CEO. “The housing market and the overall economy have continued to show signs of improvement throughout 2015. As the year comes to a close, this decision represents a strong statement of faith that the long-term fundamentals of the market point to a period of growth and sustainability. The cause of homeownership is well served by the Fed's move today.”
Auction.com EVP Rick Sharga predicts that the Fed liftoff will allow housing to fight off the persistent headwinds that have been a detriment to growth.
“One of the biggest headwinds in the housing market today is tight credit,” Sharga said. “There’s virtually no non-agency lending…nothing outside of QM, other than jumbo loans to rich borrowers the banks want to grab as customers for other services. Higher interest rates would actually allow for loans to be priced in a way that accommodated some degree of risk.”
“The cause of homeownership is well served by the Fed's move today.”
Ed Delgado, President and CEO, Five Star Institute
The Collingwood Group Director Tom Booker echoed the sentiment that the short-term rate increase is good news for the housing market
“For many in real estate, raising the cost of borrowing seems ill-timed, but for homebuyers, this may increase interest and activity,” Booker said. “The real calculus is a function of what the markets believe the next move is. Will we see one or two moves this year. Ultimately, if the near term target for interest rates is 2 percent, the path will be bumpy in the housing markets but affordable.”
Fannie Mae SVP and Chief Economist Doug Duncan described the Fed's announcement about the 25-basis point rate increase “dovish.”
“This is one small step on an overdue journey for the Fed,” Duncan said. “It should not be any surprise that markets were unsettled prior to the September meeting (rate increase expected) and to the current meeting, given the nature and magnitude of the central bank’s intervention in the economy. Market expectations of future Fed actions will likely continue to be volatile given the deviation from traditional monetary policy tools and the Fed’s outsized balance sheet. Today’s dovish statement reinforces our expectations of a gradual pace of tightening. The comment on the reinvestment policy suggests that any shrinking of the balance sheet would not begin until perhaps a year from now. We expect three more hikes in the fed funds target next year, with the 30-year fixed mortgage rate rising from 3.9 percent this quarter to 4.1 percent a year from now.”
President and CEO of United Wholesale Mortgage Mat Ishbia also agreed that the Fed's decision will be a positive change in the industry.
“Consumers that have been on the fence about moving forward will now be more likely to make a move,” Ishbia noted. “I do believe that purchase business is going to increase in 2016, while refinances will decline and adjustable rate mortgages (ARMs) will become a bigger part of business for loan officers. It’s imperative for people in the mortgage industry to educate themselves on the benefits of ARMs and to align themselves with real estate agents.”
Steve Hovland, Director of Research at HomeUnion, told DS News that homeownership will be a rare commodity next year as a result of the Fed's decision to raise rates.
“Unlike previous meetings, the Fed strongly prepped the markets for this change in monetary policy, which pushed up average 30-year mortgage rates 20 basis points, and the 10-year Treasury 25 basis points over the past few weeks,” Hovland said. “We don’t expect mortgage rates to move up in-step with the funds rate, though homeownership will be further out of reach for many renters. At 63.7 percent, the homeownership rate is near a 30-year low and will likely fall further in 2016.”
In the opinion of some, the impact of the Fed raising rates will be minimal.
Dave Gorman, Regional Sales Executive at Bank of America, noted that the rate increase will “minimally impact homebuyers” and “reflect a strengthening economy, better job outlook, rising wages, increased consumer confidence—factors that help increase demand for housing. We understand the natural concern among consumers, particularly prospective homebuyers, about slightly higher borrowing costs. With rates already at such low levels, incremental increases shouldn’t take average mortgage rates into the territory we’ve seen them in the past for some time.”
“It's a cocktail circuit conversation. Who cares?” The Collingwood Group Partner and Managing Director Thomas Cronin said. “There are several good arguments to be made for stable, even lower long-term rates, which have equally challenging implications. In any case the sky is not falling.”
The first FOMC meeting of 2016 will take place January 26-27.
Editor's note: The Five Star Institute is the parent company of DS News and DSNews.com.