Fed Rate Hike & What it Means to SF Buyers/Homeowners

Last week, the Federal Reserve Bank’s Open Market Committee (FOMC) met and as expected, the Fed raised its target short-term interest rate by .25 percent to a range of  1.75 to 2 percent.  However, that information was already priced into current mortgage rates, because investors and lenders had long been anticipating this move. The Fed under former Chair Janet Yellen indicated that it expected to raise rates three times in 2018. Last week’s increase was the second this year, so this was planned and completely expected.  Leading up to and during the meeting, mortgage rates were flat because of the expectation that was built in.   But when some surprise language came in late in the meeting’s wrap up, rates suddenly took off.  The Fed announcement indicated that it will raise interest rates two more time this year. That came as a surprise to many. But according to The Wall Street Journal earlier this year, 31 percent of investors were operating under the assumption that there would be a fourth increase in 2018.  An additional 8 percent believed that there would be five increases in 2018.

The reason for all this?  The Federal Open Market Committee (FOMC) indicated that economic activity increased “at a solid rate.” This was a more hawkish tone than their their May statement, when they called the economic improvement “moderate.”  During the meeting, Fed officials said they expect the economy to grow at a 2.8 percent rate this year, up from a 2.7 percent forecast in March. The FOMC now expects the unemployment rate to drop to 3.6 percent by the end of 2018, down from a forecast of 3.8 percent in March. All of this continued economic strengthening caused the Fed to project an additional rate increase for 2018. FOMC members also raised their headline inflation rate forecast for the year to 2.1 percent from 1.9 percent.

Today’s increase was the second this year and the seventh since the end of the Great Recession. The last time rates topped 2 percent was in 2008, at the start of the Great Recession.  While the 4th increase isn’t guaranteed, there are some wild cards in all of this that will have bearing on whether or not it actually does come to fruition.  One of those wild card is the effect of the Trump tax cuts. Intended to stimulate the economy, they could end up causing it to overheat, fuel inflation, and actually diminish buying power.  Rates (increasing them) is how the government counters inflation.  Tricky formula, but one that is necessary to maintain a strong economy here in the US and most specifically the Bay Area.

On the other hand, the less aggressive FOMC members still believe in more modest hikes, or even holding today’s rate indefinitely. It really depends on what happens in global politics and the economy over the next month.  So what does this all mean to a San Francisco home owner looking to refinance or a renter looking to finally buy in the Bay Area?  If you are presently in a fixed rate mortgage, you are in great shape.  That doesn’t mean you are in trouble if you have an ARM, necessarily. If rates continue to rise, your buying power goes down as a homebuyer.  Refinance opportunities to lower your rate and payment if you are already fixed also will decrease sharply.  I had mentioned in a previous blog post that Bay Area homeowners sitting on all of the equity that has been accumulated these last few years have different motivations for refinancing now, and not all are rate driven in this decision.

If you have an adjustable rate loan (ARM), you’ll need to get out your loan documents and do some calculating. When will it reset if rates are 1 percent, 2 percent, or 3 percent higher than they are now? Your loan should have caps that limit how much your mortgage rate can increase at any one reset or over its life. Would that rate be affordable? Email Me anytime to evaluate your options and see what is coming down the road for you in terms of a future adjustment on your current loan.

Alternatively, did you get that loan while planning to sell your home before rate resets became a possibility? How is that timeline looking now? If you planned to sell this year but are now looking at three more years, consider a 3/1 ARM refinance before rates go higher.  If you expect to be in your home indefinitely and have an ARM resetting soon, you have a couple of options. Accelerate your repayment so that there will be a lower balance to worry about when your rate rises, refinance to a new ARM now while rates are relatively affordable, refinance to a 15-year fixed loan (the rate should be about the same s the 5/1 ARM), or bite the bullet and refinance to a 30-year fixed loan while rates are still under 5 percent.

When it comes to HELOC’s, these rates are impacted immediately by way the Fed’s raising of rates.  If you have a HELOC and are noticing the increasing payments, considering combining it with your first mortgage via a refinance that fixes the payments for a more secure period of time.  In the Bay Area, 1 out of every 5 homes has a HELOC attached to it for a variety of reasons.
We will track the FED and their intention to raise rates a possible 4th time this year and how that will impact Bay Area real estate and people looking to break into the market.   Email Me anytime to discuss rates or loan strategy.