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Housing Market Strong Enough to Bear Fed Rate Hike, Poll Suggests

ratesAs the housing market strengthens, many economists believe that it could withstand an interest rate hike by the Federal Reserve this year, pending stabilization among home prices.

According to a Reuters poll, 20 of the 22 economists surveyed said that the market could withstand the Fed's anticipated rate hike, indicating that employment and housing demand from millennials as the major contributors to the markets stability.

However, earlier this month, the minutes from the July 28-29, 2015 Federal Open Market Committee (FOMC) meeting confirmed that the economy is still unprepared for a hike in the federal funds rate, but the increase is imminent.

In the Committee members' discussion on economic conditions and monetary policy most participants "judged that the conditions for policy firming had not yet been achieved, but they noted that conditions were approaching that point," according to the FOMC minutes.

However, Yellen did allude to the rate increase possibly occurring before the end of the year in a Senate Banking Committee hearing also held in mid-July .

"If the economy evolves as we expect, economic conditions likely would make it appropriate at some point this year to raise the federal funds rate target, thereby beginning to normalize the stance of monetary policy," Yellen said. "Indeed, most participants in June projected that an increase in the federal funds target range would likely become appropriate before year-end. But let me emphasize again that these are projections based on the anticipated path of the economy, not statements of intent to raise the rates at any particular time."

Further doubt about the pending rate increase were shown Monday as the performance of the stock market brought about some anxiety among big U.S. businesses and other stakeholders, while the Dow Jones dropped by 1,000 points and spent the rest of the day fighting its way back toward the break-even point.

"The real effect—if any—from the stock market volatility of the last few days won’t occur for a while," said Sean Becketti, Chief Economist at Freddie Mac. "It will take time for investors to analyze the depth of the economic weakness in China, the effectiveness of the Chinese government’s responses, and the ultimate impact on various sectors of the U.S. economy.  The interesting near-term impact is on the Fed’s September decision to raise rates or not.  Market sentiment was split roughly even before this event. Today it’s tilting toward no action in September."

In terms of housing, the committee found that recent data on housing starts and permits as well as the higher levels of sales and prices are signs of continued recovery in the market, according to the minutes.

The Reuters survey predicts that the S&P/Case Shiller composite index of prices in 20 metropolitan areas would rise at an average pace of 5.0 percent this year.

"Economists say home price increases of about 5 percent are just strong enough to raise equity for homeowners to encourage some to put their properties on the market and help address a persistent shortage of houses available for sale," Reuters said. "The increase is also not big enough to price out first-time home buyers."

About Author: Xhevrije West

Xhevrije West is a writer and editor based in Dallas, Texas. She has worked for a number of publications including The Syracuse New Times, Dallas Flow Magazine, and Bellwethr Magazine. She completed her Bachelors at Alcorn State University and went on to complete her Masters at Syracuse University.

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