Between the time I started and finished this article, I changed my mind twice. Why? Because it’s about interest rates. You know what I mean…total uncertainty. Six months ago, I wrote about increases in interest rates, but noted that there were no onerous real estate impacts to that date. Depending upon the term, mortgage rates were holding in the low 3% range. As you recall, the Fed kept the rate at zero from around 2008 to 2015 in order to stimulate the country after the great recession. After 2015, rates moved very slowly typically with ¼% hikes, eight in all. This gradual increase has been effective, albeit with various swings in the stock market, but essentially, there was general acceptance that the pace of increase would not be hurtful.
Fast forward to now, and within six months things have changed. In June the federal funds rate was at 1.75%, and today it is at 2.25% with the likelihood of being at 2.5% after today’s Federal Reserve December meeting. Year 2019 was being discussed as likely to hold four more increases.
As a result, the news has been full of opinions that the new Fed Chief Powell is moving too aggressively. Rumors abounded regarding potential inflation and the need to dampen growth, thus through an increase in borrowing costs. The stock market became more volatile with 500-point swings being the norm. National housing starts showed a slowing down, year over year and month over month. Mortgage applications were dropping. The 30-year fixed rate had jumped to almost 5%, a doubling of the not too distant past. Real estate sales were slowing in all of the recently hot cities around the United States. San Francisco, Seattle, Los Angeles, New York City and Boston were being impacted by the prospect of rate changes, as well as exacerbated by political news such as China trade wars and European economic weakness.
As a result, and just recently as I write, these red flags combined with a complete wipeout of 2018 gains in the stock market by year-end have caused the Fed to rethink its program, according to a recent Wall Street Journal article. It is also worth mentioning that President Trump, in unprecedented criticism, has publically blamed the Fed for slowing the economy. Financial news shows, as in CNBC, have also pushed for a different slower approach of making one final December increase and then pausing for a few months to reflect upon impacts…in other words go back to data driven decisions rather than a hell-bent plan of increasing a quarter point or so three to four times a year. With this amount of pressure, the Fed game plan may be changed, once again. Mortgage rate increases may slow or flatten
All of this volatility aside, it is useful to look at this issue in a long-term context. Even a 5% 30-year fixed rate mortgage is extremely low by historical standards. Prior to the great recession, from around 1998-2008, mortgages had routinely been in the 6-7% range. Despite this, the real estate market had grown enormously during the period. Prior to that, from around 1978-1990, average mortgage rates ranged above 10%, with an unbelievable peak of 16.6% in 1981.
We have been spoiled by rates in the low 3% since 2012, and it is difficult for buyers to fathom the impact of a doubling if we go to 6%. After all, it effectively means a double of monthly mortgage payment. Yes, there will be a slow-down, as seen in the last year. It may affect first homebuyers most dramatically, particularly where they carry other debt loads such as recent education borrowing. Nevertheless, we will soldier on.
To summarize, I feel about the same way as I wrote in June. Rates will increase, perhaps more slowly than expected, and markets will adjust, and there will be tolerable ramifications.
Flash PS: As I finish this writing, the Fed just this hour raised the rate but softened 2019 expectations. By the time you read this, you will probably know what that means!
Daniel Calano, CRE, is the managing partner and principal of Prospectus, LLC, Cambridge, Mass.