3 Reasons the Fed Rate Hike Is Not a Concern for the 2016 Housing Market

Posted by Laine Smith on 1/14/16 4:32 PM

Topics: Economy

Many analysts have made ill-fated predictions for 2016’s housing market conditions following the change in the Federal Reserve’s monetary policy. Last year was deemed “the housing market’s best year since the recession” but many analysts projected concerns of spiking mortgage rates, decreased home affordability and an overall reversal of the market’s gains in 2016. Here are three facts refuting those concerns.

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Image courtesy of hywards at FreeDigitalPhotos.net

Previous rate hikes haven’t caused a spike in mortgage rates.

Freddie Mac Vice President and Chief Economist Sean Becketti pointed out in commentary this week that in the mid-2000’s, mortgage rates remained around 6 percent despite the Fed raising short-term rates at 17 consecutive meetings.

A week after the Fed raised short-term interest rates in December, the average 30-year fixed mortgage rate actually dipped. This serves as a reminder that the Fed only has an indirect effect on long-term rates.

“The Fed raising short-term rates by itself doesn’t have a very profound effect on mortgage rates,” Becketti noted.

The Fed acknowledges the fragility of the economy.

Even if mortgage rates did mimic the uptick in the federal funds rate, the Fed said they would make only gradual rate increases in order to remain accommodative. Becketti said the Fed should be taken at their word.

In their December post-meeting statement, the Fed said further increases will continue to be assessed with labor market conditions and inflation in mind.

Mortgage rates are predicted to increase but minimally.

Becketti did point out that he does still believe mortgage rates will follow suit and increase but at a gradual rate. His prediction is the average to be 4.4 percent at the end of 2016, only up 0.3 percent from 2015.

A small boost in mortgage rates could decrease mortgage affordability for some homebuyers, but big picture-wise, even a 0.3 percent increase still keeps rates near records lows.

On the optimistic side of experts’ 2016 housing market predictions, there is a consensus for significant gains in new construction and continuing home price appreciation.

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