The Federal Reserve’s interest rate setting committee last month raised short-term interest rates, a move that will eventually impact all borrowers: from credit card users to car buyers to those looking to purchase or refinance a home or investment property.
Don’t panic just yet, however. The Fed’s rate hike was small (only a quarter of a percentage point) and overall rates remain near historic lows. The Federal Funds rate—a very short-term rate that banks charge each other for overnight loans—is still under .75%
More to Come.
Still, the Fed’s move is not “one and done.”
Fed Chair Janet Yellen and her colleagues at the central bank clearly signaled that they think the economy is healthy enough—with small but sure signs of inflation and wage growth—to withstand a very gradual path back toward a normal interest rate level. Fed watchers predict perhaps three more rate hikes in 2017, which, according to giant mutual fund company Vanguard, could take the Federal Funds rate to 1.5% a year from now.
Of course the Fed does not set mortgage rates—they are determined in bond markets. But the rate the Fed does control can eventually influence mortgage rates, as can the Fed’s general outlook for the economy, which is closely linked to its rate setting.
Mortgage rates are still near historically low levels, hovering just around 4.2% for a 30-year fixed loan nationally. Rates in the San Francisco area are a bit lower, right around 3.9%, on average. Multifamily, or apartment, loan rates are closer to 5% or a bit higher, though the rate you get depends on the terms, from the size of the loan to the money put down and the loan-to-value ratio.
So how fast will mortgage rates rise?
Not very fast, at least that’s the current outlook. The Fed is expected to proceed with its rate hikes very carefully. Mortgage giant Fannie Mae sees rates rising very gradually through 2017.
But that doesn’t mean property investors can ignore the Fed and the economic outlook. So, here is a list of things Bay Area landlords should think about as the Fed pushes rates higher:
- If you’ve been thinking about refinancing a mortgage loan, do it sooner rather than later. Mortgage rates are headed gradually higher, and just a half of a point rate difference on a $200,000 loan can save you $20,000 over the course of a 30-year loan.
- Watch those prices if you’re even dreaming about buying another property. Here’s why: how home buyers react to the Fed may be more important than actual rates right now. And the prospect of higher mortgage rates may already have motivated Bay Area home buyers to accelerate purchases, according to Selma Hepp, chief economist at Pacific Union International.
- Time to sell stocks? Often when the Fed begins to raise rates, it weighs on the stock market, pushing stock prices down. With a very strong local job market and a lack of housing supply, Bay Area housing may be a better investment, believe it or not, than stocks. As the Oracle of Omaha, Warren Buffett, says, “Be fearful when others are greedy and greedy when others are fearful.”
- And absolutely watch closely for signs of inflation. Not only in official data put out by the Bureau of Labor Statistics, but also in everyday prices from milk to underwear. President Elect Donald Trump is contemplating several policies—including trade sanctions and an economic stimulus package—that many economists think could cause inflation to accelerate. If that happens Janet Yellen and Co. will react quickly with higher short-term rates, and all borrowing rates could climb very quickly. Of course, real estate has historically been a hedge against inflation, since it tends to rise in value faster than inflation.
It all adds up to an uncertain future—we don’t know what 2017 will really bring and no one else does either. But we do know this much: careful and opportunistic property owners/investors can make the best of it.
They always do.