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50_Tiger
LSU Fan
Dallas TX
Member since Jan 2016
11683 posts
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Fed potentially raising rates
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?


b-rab2
LSU Fan
Lafayette
Member since Dec 2005
11365 posts

re: Fed potentially raising rates
I believe, yes. even a small raise rate will affect housing prices


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11
Shepherd88
Member since Dec 2013
1821 posts

re: Fed potentially raising rates
Yes absolutely. Your house is an investment after all.

And that’s the point of raising rates to cool off the markets.


50_Tiger
LSU Fan
Dallas TX
Member since Jan 2016
11683 posts
 Online 

re: Fed potentially raising rates
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.


GoIrish02
Notre Dame Fan
Metairie
Member since Mar 2012
565 posts

re: Fed potentially raising rates
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.


50_Tiger
LSU Fan
Dallas TX
Member since Jan 2016
11683 posts
 Online 

re: Fed potentially raising rates
Lol serial downvoter in MT???

Someone must of just bought a house overpriced .


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38
ATLdawg25
Georgia Fan
Atlanta, GA
Member since Oct 2014
3579 posts
 Online 

re: Fed potentially raising rates
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.


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70
GoIrish02
Notre Dame Fan
Metairie
Member since Mar 2012
565 posts

re: Fed potentially raising rates
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.


50_Tiger
LSU Fan
Dallas TX
Member since Jan 2016
11683 posts
 Online 

re: Fed potentially raising rates
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.


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02
Decisions
LSU Fan
Member since Mar 2015
402 posts
 Online 

re: Fed potentially raising rates
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.


lynxcat
Rutgers Fan
Member since Jan 2008
18711 posts

re: Fed potentially raising rates
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.


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82
GenesChin
Army Fan
The Promise Land
Member since Feb 2012
29622 posts

re: Fed potentially raising rates
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


makersmark1
Auburn Fan
earth
Member since Oct 2011
4975 posts

re: Fed potentially raising rates
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.


GenesChin
Army Fan
The Promise Land
Member since Feb 2012
29622 posts

re: Fed potentially raising rates
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 at 2:26 pm


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BACONisMEATcandy
LSU Fan
Member since Dec 2007
45551 posts
 Online 

re: Fed potentially raising rates
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 at 4:33 pm


GoIrish02
Notre Dame Fan
Metairie
Member since Mar 2012
565 posts

re: Fed potentially raising rates
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.


Doc Fenton
LSU Fan
New York, NY
Member since Feb 2007
52458 posts

re: Fed potentially raising rates
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.


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GenesChin
Army Fan
The Promise Land
Member since Feb 2012
29622 posts

re: Fed potentially raising rates
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 at 2:34 pm


jimbeam
USA Fan
University of LSU
Member since Oct 2011
45765 posts

re: Fed potentially raising rates
So do I need to buy a house before rates go up?


KillTheGophers
Texas Fan
Nawtheastlouisiana
Member since Jan 2016
2141 posts

re: Fed potentially raising rates
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.



This post was edited on 10/8 at 3:00 pm


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