By unanimous vote, the Federal Reserve agreed to raise the federal fund rate (aka short-term interest rate) showing their confidence in an improving United States Economy. The Fed will raise their rates from near zero to 0.25 to 0.5 percent, a decision that had been expected to come at several different points in 2015. The Fed will shift between 0.25 and 0.5 based on market conditions. They are also willing to adjust their strategy based on how the economy performs in response to the move.
The Fed has kept rates at near zero since 2008. During the recession, the Fed did all they could to entice borrowers back into the fold. Now that the labor market and housing market have started performing well, the Fed has decided that now is the time to get rates up again. So far, the market has performed well in response to the news, with the Dow Jones Industrial Average rising by 224.18 points.
The Fed pointed to strong dollar values and a rebounding labor market as the major factors that convinced them to raise rates. As the dollar value has risen, emerging market companies that borrowed heavily during low rate periods will now have to pay more to payoff the debt.
But how will the rates affect the housing market?
With a rise in interest rates, each subsequent lender will need to raise their rates as well to keep their business profitable. It is fully expected that mortgage rates will increase over 2016. Mortgage rates have been at historically low levels during the recession. Buyer confidence has improved over 2015, allowing the Fed to raise rates without losing all their borrowers.
Although mortgage rates will in all likelihood increase, according to the National Association of Realtors Chief Economist Lawrence Yun, the small uptick should not have a major affect on borrowers. However, other experts believe this is the first of several upticks, in which case mortgage rates may rise at several points over 2016.
Currently the 30 year fixed rate mortgage sits at 3.93 percent. In the short term, the housing market might actually have a small surge, as fence sitting buyers take the plunge with rising mortgage rates on the horizon.