Will the Fed destroy the housing recovery?

The news on the street is that the Federal Reserve is dead set on hiking the Federal Funds Rate tomorrow.  

While this does not directly affect the mortgage market, it is a precursor to higher rates overall.

Banks are required to keep a certain percentage of cash deposits on hand at all times.  Sometimes they need to borrow money overnight to meet that requirement.  The interest rate at which they borrow overnight is called the Federal Funds Rate.  

Banks set their mortgage rates based on their expectations of future rates and the current yield of 10-year Treasury Bonds.  

This expectation is why you’ve seen the mortgage rates move higher 10 days out of the last 12 business days.  Also, the 10-year Treasury Bond has seen it’s rate increase steadily since the election last November.  It closed yesterday at the highest rate since 2014. 

Since the election last November, the average 30-year fixed mortgage has increased from 3.5% to 4.2%.  On an average home in Nashville, the payment increased $100 per month.

If everything goes as expected, I do not expect further rate hikes because the market has already built in a Fed Rate hike.  If not, you might have to hold on for a wild ride.

Most economist do not expect the local housing market to be significantly affected until the rates hit 5.5% or higher.  It’s possible that we could get there in the next 2 - 3 years.  

Until then, the Nashville housing market will keep chugging along.  Our market is primarily driven by the 80+ net people per day that are moving to this area and not by low interest rates.  

So, what does all this mean to you?

1. If you are thinking about buying, do it is now while the rates are close to all time lows.  
2. Consider converting any long term debt with a variable rate to one with a fixed rate.  

If you have further questions on the market, give me a call at 615.519.0983.  
 

The Daily Deal in Nashville is a cute cottage in a great location near Hillsboro Village and Green Hills.  This one needs renovating and is listed for less than $400,000.

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