The Federal Reserve made the long-awaited, much-anticipated announcement on Wednesday afternoon that federal funds target rate will increase by a quarter of a percentage point from its near-zero level where it has been since 2006.
The announcement came as the Fed wrapped its eighth and final Federal Open Market Committee (FOMC) meeting of 2015 on Wednesday afternoon.
The federal funds rate is now one-fourth to one-half percent, according to the FOMC.
After a widely-expected rate increase did not happen at the September FOMC meeting, the Fed stated that “In determining how long to maintain this target range, the Committee will assess progress—both realized and expected—toward its objectives of maximum employment and 2 percent inflation.” Another FOMC meeting came and went in October, albeit with much less fanfare than the September meeting, without the Committee raising the federal funds target rate.
The Fed’s decision to raise short-term interest rates took into account, “a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.” In what many analysts and economists saw as the final piece of the puzzle, the November employment summary released by the Bureau of Labor Statistics in early December reported 211,000 jobs added in November, an unemployment rate of 5.0 percent, and an average monthly job gains of 218,000 for the three-month period from September to November.
"This action marks the end of an extraordinary seven-year period during which the federal funds rate was held near zero to support the recovery of the economy from the worst financial crisis and recession since the Great Depression. It also recognizes the considerable progress that has been made toward restoring jobs, raising incomes, and easing the economic hardship of millions of Americans. And it reflects the Committee’s confidence that the economy will continue to strengthen. The economic recovery has clearly come a long way, although it is not yet complete." -Fed Chair Janet Yellen
So how will this affect housing overall in the long-term? Will sales decline? Is affordability out the window?
Housing and mortgage finance experts and executives weigh in with MReport on how this increase in rates will affect their specific industries over the next year.
“I applaud the Federal Reserve for making the long overdue decision to raise the federal funds rate," said Ed Delgado, Five Star Institute President and CEO. "The housing market and the overall economy have continued to show signs of improvement throughout 2015. As the year comes to a close, this decision represents a strong statement of faith that the long term fundamentals of the market point to a period of growth and sustainability. The cause of homeownership is well served by the Fed's move today."
Dave Gorman, Regional Sales Executive at Bank of America noted that the rate increase will "minimally impact homebuyers" and "reflect a strengthening economy, better job outlook, rising wages, increased consumer confidence—factors that help increase demand for housing."
"We understand the natural concern among consumers, particularly prospective homebuyers, about slightly higher borrowing costs," Gorman explained. "With rates already at such low levels, incremental increases shouldn’t take average mortgage rates into the territory we’ve seen them in the past for some time."
Fannie Mae SVP and Chief Economist Doug Duncan described the Fed's announcement about the 25-basis point rate increase “dovish.”
“This is one small step on an overdue journey for the Fed,” Duncan said. “It should not be any surprise that markets were unsettled prior to the September meeting (rate increase expected) and to the current meeting, given the nature and magnitude of the central bank’s intervention in the economy. Market expectations of future Fed actions will likely continue to be volatile given the deviation from traditional monetary policy tools and the Fed’s outsized balance sheet. Today’s dovish statement reinforces our expectations of a gradual pace of tightening. The comment on the reinvestment policy suggests that any shrinking of the balance sheet would not begin until perhaps a year from now. We expect three more hikes in the fed funds target next year, with the 30-year fixed mortgage rate rising from 3.9 percent this quarter to 4.1 percent a year from now.”
When questioned about how the rate hike will affect the housing market, Mike Hardwick, Founder and President of Churchill Mortgage said in an interview that this will motivate "on the fence" buyers to move forward with purchasing a home.
"The Fed only raised rates a quarter of a percent," Hardwick said. "Moving the rates up too fast could really spook the markets and who knows what that would mean; it could really cause an overall economy stall, but I don’t think they will do that."
President and CEO, United Wholesale Mortgage Mat Ishbia also agreed that the Fed's decision will be a positive change in the industry.
"Consumers that have been on the fence about moving forward will now be more likely to make a move," Ishbia noted. "I do believe that purchase business is going to increase in 2016, while refinances will decline and adjustable rate mortgages (ARMs) will become a bigger part of business for loan officers. It’s imperative for people in the mortgage industry to educate themselves on the benefits of ARMs and to align themselves with real estate agents."
Steve Hovland, Director of Research at HomeUnion told MReport in an interview that homeownership will be a rare commodity next year as a result of the Fed's decision to raise rates.
"Unlike previous meetings, the Fed strongly prepped the markets for this change in monetary policy, which pushed up average 30-year mortgage rates 20 basis points, and the 10-year Treasury 25 basis points over the past few weeks. We don’t expect mortgage rates to move up in-step with the funds rate, though homeownership will be further out of reach for many renters. At 63.7 percent, the homeownership rate is near a 30-year low and will likely fall further in 2016."
The first FOMC meeting of 2016 will take place January 26-27.
Click here to view the full announcement.
Editors Note: The Five Star Institute is the parent company of MReport and MReport.com.