Real Estate Reality Check: The 3 “P’s” of the Rate Hike

After much talk for a very long time but not a lot of action…the federal interest rate hike has finally arrived. On Wednesday (12/14), the Federal Reserve increased its key interest rate by 0.25%. This marks only the second time in a decade that the Fed has raised rates (the first being in December of 2015…we are starting to think it’s the governments way of saying Merry Christmas!). While the move can be viewed as a positive sign of confidence in the US economy, it understandably makes existing and potential homeowners pretty nervous, especially in the big scheme of affordability and the yet-to-be seen impact of a new President-elect. Before you make any decisions about how this rate hike, and the projected three to ensue next year, changes your real estate plans – let’s look at the three ‘P’s of the rate hike…

THE PERSPECTIVE

While the reality of rising rates is enough to make any homeowner’s blood pressure rise – first consider that rates have been much higher in the past (at a time when many of us were first buying homes…nope, we aren’t aging ourselves at all!). Even as rates linger above 4%, consider that in the 1990’s rates hovered between 7% and 9%, and from 2001-2007, they shuffled between 5% and 7%. Plus, note that the last Fed rate hike occurred 12 months ago – yet we saw a rate decline in much of 2016. Long story short, there are other factors that impact rates (keep an eye on that 10-year U.S. Treasury Bond…), and consider the positive indicators for employment and the economy that drove Feds to make this move in the first place. Throw in the fact that we live in Silicon Valley, and that for every tech job created -  approximately 4.3 MORE jobs are created in other local goods and services ~ we have a solid chance of sustaining the income to meet what future affordability will entail.

THE POSITIVE

Don’t call either of us Pollyanna….but there are two potential positives to the Fed rate hike. First, you might actually earn interest on your savings again. Though small, consumers can expect to see some interest accrue in their savings and certificate of deposit accounts in the short term. A  ‘real’ difference could take 1-2 years at least – but something is better than nothing! In addition, CNBC reports that “rising U.S. rates typically mean better yields for U.S. Treasurys and a stronger U.S. dollar” – which proved true immediately following Wednesday’s announcement. With opportunity to be gained in other parts of your portfolio, the hope is these gains can help offset the impact to your affordability, while attracting global capital interest in US markets.

THE POSSIBILITIES

There are different opportunities available for buyers, sellers and investors. Buyers who have been on the fence may not want to wait too much longer – especially if the prediction of three rate hikes of 0.25% comes to pass. Managing a little less affordability now is better than losing a lot of affordability later. Sellers might see a heightened demand, and discover that buyers are willing to pay a premium to enter the market now. Investors may wish to hold onto current property investments while demand continues to drive prices, and simultaneously diversify newly opened investment opportunities in other parts of their portfolio.

The best gift you may be able to give yourself this season is a great financial advisor, a solid mortgage strategist and two determined and dedicated real estate agents who will always help you assess if a move makes sense – or not! While we may not fit in your stocking – and you may not want us to – please consider our commitment to industry analysis an ever-present resource to you ~ red bow included!

Resources Used:

- What a Fed rate hike means for you

- Fed Rate Hike Could Be Good News For Some Markets: Real Estate Center Economist

- Those higher interest rates in the US next year could make big problems for China

- NEW STUDY: FOR EVERY NEW HIGH-TECH JOB, FOUR MORE CREATED