In a not-so-surprising move, interest rates are heading up. Most people expected the recent move made by the Fed, but what does it mean for the rest of us?
After long debate, the Fed finally raised interest rates for the first time in nine years. What will this new trend mean for the U.S. property market? What financial maneuvers do real estate owners, buyers, and investors need to be making right away?
Some media outlets have put a positive spin on the rate hike, but others have been decidedly fearful of it. The stock market retracted at every hint of a hike during the last half of 2015. Many don’t believe the U.S. is ready for a new rising rate environment. Yet, at the same time, the Fed has been under serious pressure to maintain confidence that the economy is growing, and to spur new growth. So far, many argue that low interest rates haven’t sparked that growth.
It may not be the Christmas present that many wanted, but it is here. The big question is what it means for those in the U.S. real estate market, and what to do about it.
The Fed hasn’t raised interest rates since 2006. The big difference between now and then is that the economy was roaring: unemployment was lower, growth was furious, and many were still flush. While increasing rates weren’t the only factor in play, we all know what came shortly after that – the global crises. Right now, many would consider this new rate hike to be more about spurring growth, rather than slowing it. However, we will have to wait and see how it plays out. What we do know is that rates are going up, and it is going to start costing more to borrow. So how will that specifically impact Americans, and their finances?
According to the St. Louis Fed, 30-year fixed mortgage rates were consistently above 7.5 percent for most of the 30 years leading up to 2001. From 1979 through 1990, they were above 10 percent. During the early 80s, the average rate was more than 17 percent. Most can’t fathom that rates would ever go that high again, or what it would be like. Note that those with less than great credit could expect to pay far more than average rates. We don’t know if mortgage rates will go that high anytime in the near future, but historic data suggests they will keep going up for a while.
The big banks instantly raised prime rates on the Fed news. The move most notably impacts home equity lines of credit. Those with HELOCs could see payments going up immediately.
Financial experts predict that credit cards, auto loans, personal loans, and adjustable rate mortgages will feel the hike next. This could make life more expensive for just about everyone. This is especially true for those needing new cars in the near future, and who have large credit card balances, and may see their home mortgage and investment property loan payments all rising at the same time.
Current property owners that have been thinking of selling, or that know they need to sell in the near future, can’t afford to overlook the potential impact of rising rates. The higher borrowing costs are, the fewer buyers that may qualify to purchase the property, and less profitable it may appear to real estate investors. This may be balanced out if rents keep rising, as they have been, and if wage growth is spurred by rising rents.
While mortgage rates may not leap overnight, there is a clear advantage for buyers to speed up their process and lock in low fixed-rates and payments. This can be even more significant for buy and hold real estate investors looking to lock in passive income and long term wealth building. If there is a time to go all out with building a real estate portfolio; it’s now.