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WHAT THE FED RATE HIKE REALLY MEANS

12/21/2015

In This Issue

Last Week in Review: The Fed raised rates. Find out what this may mean for home loan rates. 

Forecast for the Week: Plenty of economic data will be unwrapped in a short holiday week.

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Last Week In Review

"These are extraordinary times." Bon Jovi. The Federal Open Market Committee marked the end of an "extraordinary seven-year period" Wednesday when it announced the first increase to the Fed's benchmark Federal Funds Rate in nearly a decade. 

This rate, which is used when banks lend money to each other overnight, was held near zero to support economic recovery following "the worst financial crisis and recession since the Great Depression," said Fed Chair Janet Yellen. The Fed upped the target rate range a quarter point, to between 0.25 and 0.5 percent. 

According to Yellen, the move "recognizes the considerable progress that has been made toward restoring jobs, raising incomes and easing the economic hardship of millions of Americans." The increase also reflects the Fed's confidence that economic factors still lagging behind desired levels will continue to improve, especially inflation, manufacturing and new home construction. 

November Housing Starts, for example, rose 10.5 percent from October, according to the Commerce Department. This was above expectations. The jump nearly erases the 12 percent decline from September to October. After months of significantly higher multifamily unit home starts, single-family home starts were up to the highest level since January 2008. 

So how will the Fed's actions impact home loan rates? The increase to the Fed Funds Rate does not directly impact long-term consumer loans like purchase or refinance home loans, so home loan rates will not necessarily increase as a direct result of the Fed's actions. 

However, it's important keep a watchful eye on economic headlines. The economic conditions that made the Fed comfortable with a rate hike—coupled with expectations of a further strengthening economy—could amplify investments in Stocks, which could negatively impact Bonds. This includes Mortgage Bonds, to which home loan rates are tied. 

For now, average fixed conventional and government home loan rates remain attractive AND under 4% as per the weekly market survey published by “Freddie Mac”.

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Forecast For the Week

The short holiday week will still deliver big gifts as investors unwrap economic data.

  • Look for the final reading for third quarter Gross Domestic Product on Tuesday.
  • Two key housing reports will be released, starting with Existing Home Sales on Tuesday and New Home Sales on Wednesday.
  • Wednesday also brings Durable Goods Orders, Personal Consumption Expenditures, Personal Spending, Personal Income and the Consumer Sentiment Index.
  • As usual, weekly Initial Jobless Claims will be delivered Thursday.

The Stock market will close at 1:00 p.m. EST and the Bond markets will close at 2:00 p.m. EST on Thursday, December 24. Both the Stock and Bond markets will be closed on Friday, December 25 for the Christmas holiday. 

Remember: Weak economic news normally causes money to flow out of Stocks and into Bonds, helping Bonds and home loan rates improve. In contrast, strong economic news normally has the opposite result.

When you see these Bond prices moving higher, it means home loan rates are improving—and when they are moving lower, home loan rates are getting worse.

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By: Michael Borodinsky

Vice President/Regional Builder Branch Manager | Caliber Home Loans

NMLS #460228

 

 

 

 

 

 

 

Call Michael: 732-382-2654

Email Michael: Michael.Borodinsky@caliberhomeloans.com

Follow Michael on Twitter: @mikeborodinsky

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