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No Rise in Federal Interest Rates - What Does That Mean?

Monday, October 05, 2015

No Rise in Federal Interest Rates - What Does That Mean?

Turner Associates has been watching the Fed closely to see what action they might take on interest rates. Rates were close to going up in the past month, but it was not to be. Read our latest blog post to learn more and how this impacts residential real estate.

A Last Minute Change in Plans

Housing Interest RatesThe lighting was set, the props were in place, and the Federal Reserve was ready to raise interest rates in mid-September for the first time since 2008. Just before the curtain rose, the global economy entered a tailspin. The New York Stock Exchange plunged due to volatility in emerging markets and China, and the Federal Reserve decided to hold off on raising interest rates for now. Although this decision possesses benefits for today’s homebuyers, the chances for a rate hike have not vanished. The Fed is simply kicking the can further down the road, and homebuyers need to know what this means for their pockets.

October and December Meetings Remain on the Agenda

On October 2, 2015, the Labor Department will announce the job creation results for September. Slower than anticipated job growth will lessen the chances for a rate hike during the October 27th through 28th meeting of the Federal Open Market Committee of the Federal Reserve Board.  However, the Federal Reserve will also have another meeting in December if they decide to hold off on the rate hike in October.

Why would the Fed raise interest rates with a weaker jobs report?

Interest rates have remained steady and near-zero for longer than any previous period in history. With the politicians taking the spotlight for 2016, pressure is mounting to increase the interest rates regardless of economic indicators. Furthermore, raising the interest rates would give the Fed a bargaining chip to help the economy in the event of severe economic decline.

No rate hike and bank decisions will impact potential homebuyers.

Additionally, banks have managed to gather a pool of funding sources without the assistance of the Fed. This means banks could still offer lower interest rates to homebuyers at their discretion. However, a minimal rate hike would still save homeowners money on mortgages. According to chairman of the money management firm, Navellier & Associates, Louis Navellier, reputable borrowers will still be able to easily access home loans at minimal rates. Potential homebuyers with questionable creditworthiness would continue to be required to pay more at higher, bank-determined interest rates.

For potential homebuyers who have attempted to save money during the past seven years, the lack of a rate hike is harmful. It leaves interest rates disheartening on certificates of deposit (CDs) and other savings accounts, and saving money to purchase a home has taken longer than historically common, especially for the lower and middle class.

Chair Janet L. Yellen alludes to a coming rate hike.

Federal Open Market Committee Chair Janet L. Yellen explained how every meeting of the committee is a live meeting and an opportunity to raise interest rates. She went on to diminish the impact of the global economy in the Fed’s decision to hold off on raising interest rates. Instead, her rationale focused more on domestic concerns within the US economy. Her statements are enough of a warning for increased chances of a coming rate hike in the next few months.

Potential homebuyers who have the savings to purchase a home today will enjoy lower interest rates, monthly payments, and overall terms of their mortgages. However, until the return of higher interest rates around three and four percent, potential homebuyers who are trying to save money will continue waiting and watching. In the macrocosm of the US economy, not much is going to change if and when the Federal Reserve raises rates this year. True impacts are going to take time to develop.

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