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Message
Fed potentially raising rates
Posted on 10/6/17 at 12:20 pm
Posted on 10/6/17 at 12:20 pm
Hey MT guru's,
I am no financial wizard but another thread on the board got me to thinking about the Fed raising rates due to full employment.
My question is this:
If the Fed raises rates too high, could this negatively impact housing markets?
For instance, right now people can buy 400k+ homes because rates are still really cheap. However, lets say the rates start to climb to 5-6%, the same people would be able to afford less house, reducing demand of housing, and reducing value of already bought homes.
The loss of value of those homes if impacted enough could leave homeowners upside down no?
I am no financial wizard but another thread on the board got me to thinking about the Fed raising rates due to full employment.
My question is this:
If the Fed raises rates too high, could this negatively impact housing markets?
For instance, right now people can buy 400k+ homes because rates are still really cheap. However, lets say the rates start to climb to 5-6%, the same people would be able to afford less house, reducing demand of housing, and reducing value of already bought homes.
The loss of value of those homes if impacted enough could leave homeowners upside down no?
6
Posted on 10/6/17 at 12:26 pm to 50_Tiger
I believe, yes. even a small raise rate will affect housing prices
Posted on 10/6/17 at 12:27 pm to 50_Tiger
Yes absolutely. Your house is an investment after all.
And that’s the point of raising rates to cool off the markets.
And that’s the point of raising rates to cool off the markets.
Posted on 10/6/17 at 12:29 pm to Shepherd88
quote:
Yes absolutely. Your house is an investment after all.
And that’s the point of raising rates to cool off the markets.
So for instance ive been watching the North Dallas housing market the last 18 months and people are paying out of their butt's for homes that were valued @ 250k being sold @ 375k. Now I am aware a portion of the reason for the inflation of prices is due to demand and new money rolling in, but it got me to thinking about these folks who have already bought and if indeed the market falls, they are literally stuck in a home they can't leave.
Posted on 10/6/17 at 12:32 pm to 50_Tiger
You're right, everything bought on credit/loans will become more expensive and drop in price.
Despite declining price levels and weak leading economic indicators, Yellen will still raise rates primarily just to screw Trump, in spite of clear economic factors & weaknesses that would dictate doing nothing.
Maintaining a minimum level of inflation is just a stupid idea without any political influence. At a 2% target inflation rate, that theory means the price of everything will double in 36 years, not to mention the short term more violent disruptions the Fed is about to cause.
Despite declining price levels and weak leading economic indicators, Yellen will still raise rates primarily just to screw Trump, in spite of clear economic factors & weaknesses that would dictate doing nothing.
Maintaining a minimum level of inflation is just a stupid idea without any political influence. At a 2% target inflation rate, that theory means the price of everything will double in 36 years, not to mention the short term more violent disruptions the Fed is about to cause.
Posted on 10/6/17 at 12:34 pm to GoIrish02
Lol serial downvoter in MT???
Someone must of just bought a house overpriced
.
Someone must of just bought a house overpriced
.
Posted on 10/6/17 at 12:39 pm to 50_Tiger
quote:
So for instance ive been watching the North Dallas housing market the last 18 months and people are paying out of their butt's for homes that were valued @ 250k being sold @ 375k. Now I am aware a portion of the reason for the inflation of prices is due to demand and new money rolling in, but it got me to thinking about these folks who have already bought and if indeed the market falls, they are literally stuck in a home they can't leave.
That would be a function of a bubble in that market, not so much the interest rates. Even if they raise rates, the change required to price those people out of their own homes would happen over the course of years. It's not like the fed will raise rates in Q4 and home prices will drop 100k overnight.
Posted on 10/6/17 at 12:39 pm to 50_Tiger
No one is stuck in a house, they only realize the loss if they sell. All the commerce in Texas is real, unlike most of the country, where housing is generally flat or deteriorating.
If you buy a house and stay for an average of 6~7 years (according to Shiller) the effect of monthly or annual price swings doesn't really affect you.
If you have to default, it's not the end of the world, as we've learned since 2008. That's why the bank charges interest, to compensate for default risk.
If you buy a house and stay for an average of 6~7 years (according to Shiller) the effect of monthly or annual price swings doesn't really affect you.
If you have to default, it's not the end of the world, as we've learned since 2008. That's why the bank charges interest, to compensate for default risk.
Posted on 10/6/17 at 12:42 pm to GoIrish02
quote:
That would be a function of a bubble in that market, not so much the interest rates. Even if they raise rates, the change required to price those people out of their own homes would happen over the course of years. It's not like the fed will raise rates in Q4 and home prices will drop 100k overnight.
quote:
No one is stuck in a house, they only realize the loss if they sell. All the commerce in Texas is real, unlike most of the country, where housing is generally flat or deteriorating.
If you buy a house and stay for an average of 6~7 years (according to Shiller) the effect of monthly or annual price swings doesn't really affect you.
If you have to default, it's not the end of the world, as we've learned since 2008. That's why the bank charges interest, to compensate for default risk.
This is exactly what I was trying to figure out!
Input is much appreciated.
Posted on 10/6/17 at 1:28 pm to 50_Tiger
You're only going to be upside down if you bought a house with the intention of flipping it before the notes piled up, IMO. No one is going to buy a long-term/forever home above budget, and as long as it's a fixed-interest loan I don't see how it hurts them.
Buying power shouldn't be affected either because as you said, higher interest should drive demand and cost down until they rebalance.
The only people at real risk are the speculators. Money has been too cheap for too long and it's caused multiple markets to inflate to unhealthy levels. Just because the housing market goes down for a bit that doesn't make it a negative impact. It's just a natural part of the cycle. Prepare accordingly.
Buying power shouldn't be affected either because as you said, higher interest should drive demand and cost down until they rebalance.
The only people at real risk are the speculators. Money has been too cheap for too long and it's caused multiple markets to inflate to unhealthy levels. Just because the housing market goes down for a bit that doesn't make it a negative impact. It's just a natural part of the cycle. Prepare accordingly.
Posted on 10/6/17 at 1:33 pm to Decisions
Long term, zero interest rates are not sustainable so I am in favor of slowly raising the rates. It gives the Fed more options in the future when we undoubtedly have another crash.
Posted on 10/6/17 at 1:46 pm to GoIrish02
quote:
Yellen will still raise rates primarily just to screw Trump
Yellen is not making rate decisions based on Trump. This is an absolutely ludicrous notion
quote:
not to mention the short term more violent disruptions the Fed is about to cause.
Giving guidance and the following guidance is one of the most stabling actions the FED can take. If FED's rate-making decisions are trusted/consistent with guidance that reduces disruptions in the markets
quote:
At a 2% target inflation rate, that theory means the price of everything will double in 36 years,
Average historical US inflation rate is above 3% and inflation is not inherently bad for the economy.
You don't want to get into a ZIRP situation like Japan
Posted on 10/6/17 at 2:06 pm to 50_Tiger
There is a several hundred fold difference between bank deposit rates and mortgages.
.05 to 3.0%
I think rates can go up some without crippling the economy.
.05 to 3.0%
I think rates can go up some without crippling the economy.
Posted on 10/6/17 at 2:25 pm to makersmark1
quote:
There is a several hundred fold difference between bank deposit rates and mortgages.
Mortgage rate correlation is much higher with the 10yr treasury bond rate. The 10yr bond rate probably remains fairly stable keeping mortgage rates relatively close to current market rates
As mortgage rates go up though, I imaigne most major lenders will try to offset a minor part of the increase by stripping out expenses / moving to lower cost distribution systems
This post was edited on 10/6/17 at 2:26 pm
Posted on 10/7/17 at 11:06 am to GenesChin
quote:
Yellen is not making rate decisions based on Trump. This is an absolutely ludicrous notion
Saying who the President is and their actions don’t have any influence on the Fed’s policy is an absolutely ludicrous notion.
This post was edited on 10/7/17 at 4:33 pm
Posted on 10/7/17 at 7:12 pm to GenesChin
quote:
Yellen is not making rate decisions based on Trump. This is an absolutely ludicrous notion
She's not making decisions based any sort of economic logic, raising rates in a stagnating economy that can't even maintain 1% core inflation despite her last rate increase, and yet to post 3% GDP growth in over 8 years.
Increasing borrowing costs in a weak economy is a recipe for disaster, and the only logical rationale she would have for doing so is political. Raising borrowing costs is the opposite of what the Fed would do in the current weak economy if they were focused on stability.
ZIRP cannot go away now, the US Treasury would be bankrupt sooner than 2021 when it is forecasted to be totally busted.
Posted on 10/7/17 at 7:33 pm to GoIrish02
quote:
She's not making decisions based any sort of economic logic
That's an overstatement, but I would agree that the current FOMC logic doesn't make sense in terms of taking into account the bigger picture. It's difficult to really blame any person in particular, due to the Fed's "dual mandate." From the FRB of Chicago ( LINK):
quote:
In 1977, Congress amended the Federal Reserve Act, directing the Board of Governors of the Federal Reserve System and the Federal Open Market Committee to "maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates."
Traditionally (or for the last 20 years or so?), that "stable prices" part has been interpreted as 2% inflation targeting for PCE (personal consumption expenditures), but the Fed ought to get rid of that artificial target, because it doesn't fit the current environment.
Finally, while I don't think Yellen is playing politics, it's also true that you cannot completely separate political viewpoints from monetary policy considerations. If your political viewpoint leads you to suspect that a necessary correction might blunt some of Trump's short-term ability to implement destructive economic policies, then you might be subconsciously inclined to time your decisions sooner rather than later. It doesn't even have to be intentional, but your filter for interpreting economic news can be different depending on how you judge expectations of political policy changes.
Posted on 10/8/17 at 2:33 pm to BACONisMEATcandy
quote:
Saying who the President is and their actions don’t have any influence on the Fed’s policy is an absolutely ludicrous notion.
I meant in reference to decisions made specifically for "screwing" Trump politically. As in "Yellen is not making rate decisions based on trying to hurt Trump's political standing.
Maybe during a reelection cycle it would be somewhat realistic. Even then, I have a hard time believing the FED Reserve chair would prioritize political manipulation over economic health. These economists have their reputation to protect and it means a ton to them
This post was edited on 10/8/17 at 2:34 pm
Posted on 10/8/17 at 2:47 pm to GenesChin
So do I need to buy a house before rates go up?
Posted on 10/8/17 at 2:52 pm to jimbeam
Yes - now is the time if you plan to be there a while.
Also, if you have any floating rate debt (line of credit, etc) now is the time to term those out and lock a rate.
The ability to secure long term, low interest rates is critical right now....personal debt and business debt. In fact, term may be a bit more important than rate.
I believe smaller banks are a about to be facing some serious decisions. Larger banks should be able to make hand over fist though....but an interest rate increase is already priced in many of those stocks.
Also, if you have any floating rate debt (line of credit, etc) now is the time to term those out and lock a rate.
The ability to secure long term, low interest rates is critical right now....personal debt and business debt. In fact, term may be a bit more important than rate.
I believe smaller banks are a about to be facing some serious decisions. Larger banks should be able to make hand over fist though....but an interest rate increase is already priced in many of those stocks.
This post was edited on 10/8/17 at 3:00 pm
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