At December's Federal Open Market Committee meeting, the Fed raised its benchmark Federal Funds Rate for the first time in nearly a decade. This is the rate at which banks lend money to each other overnight. It had been near zero to support economic recovery from the worst financial crisis since the Great Depression. The Fed felt that the economy had strengthened enough for a small increase to its benchmark rate.
What does this mean for home loan rates?
The Fed Funds Rate is not directly tied to long-term rates on consumer products, like purchase or refinance home loans. So home loan rates will not increase as a direct result of the Fed's actions.
Instead, home loan rates are based on Mortgage Backed Securities, which are a type of Bond. If the economy continues to improve, home loan rates could move higher. Strong economic news usually causes money to flow out of Bonds and into higher risk investments like Stocks, which can cause Bond prices and home loan rates to worsen.
However, when times are tough, or when there is uncertainty here or overseas (like the recent market crash in China), investors tend to shelter their cash in less risky investments like Bonds. This typically causes both Bond prices and home loan rates to improve.
Time will tell if home loan rates are able to remain near historic lows this year. One thing is certain: This year will be filled with interesting economic activity that is important to you. And, I'll be here to report the latest each and every month. Stay tuned!
If you or anyone you know has questions regarding refinancing or home loan products, please get in touch today.
What to Watch: Existing Home Sales.
Existing Home Sales declined sharply from October to November, after a modest decline from September to October. Does this affect the long-term housing outlook?
What is the Existing Home Sales report? The Existing Home Sales report measures sales of pre-owned single-family homes, as reported by the National Association of REALTORS® (NAR) from 650 local associations. It covers geographical numbers, prices, inventory and the number of months it would take to deplete the existing supply of pre-owned houses.
What's happened recently? NAR reported Existing Home Sales in November fell 10.5 percent from October. This was the sharpest monthly decline since July 2010, when sales deflated due to expiring homebuyer tax credits.
What's the bottom line? Lawrence Yun, NAR chief economist, affirmed buying interest is still high but blamed the decline mainly on closing delays caused by new federal "Know Before You Owe" rules implemented by the Consumer Financial Protection Bureau in October. Other factors presenting challenges to potential buyers were rising home prices and lingering tight inventories across much of the country. While regulatory changes and home prices are expected to moderate in 2016, historically low home loan rates make home buying attractive right now.
I'll continue to monitor economic reports closely. If you have any immediate questions about loan products or home loan rates, please call or email today.