- The rate hike is 25 basis points— or, one quarter of one percent. Within minutes of the Fed’s decision, banks such as JPMorgan Chase, US Bancorp and Wells Fargo raised their prime rates from 3.25% to 3.5%. Citibank and others raised their rates as well.
- A 0.25% increase in interest rates = 3% rise in monthly mortgage payments.
- The Federal Reserve Governors unanimously decided to raise interest rates, a sign of the economy’s strength. A rate hike typically happens when the economy is doing well and the Fed wants to keep inflation in check.
- This is a very modest rate hike, and we will likely see rates continue to rise gradually over the next couple of years, provided the economy stays on track. Interest rates have been at historic lows since the start of the financial crisis in 2008.
- A higher interest rate makes the US dollar stronger. Foreign investors find the US even more attractive as a safe haven for their capital. However, a stronger dollar will make American goods more expensive for foreign buyers. US consumers will find that they have higher spending power when traveling abroad.
IMPACTS ON THE REAL ESTATE MARKET
- Mortgage lenders have expected the Fed to hike rates for a long time. They have already factored it into mortgage rates. The increase is likely to have little immediate effect on fixed‑rate mortgages.
- Rising interest rates will increase the cost of capital. That may slow the growth of new real estate developments.
- A higher rate staves off a housing bubble (and stock market bubble) as there is more incentive to save and will likely put a cap on inflation.
And remember, this is a modest rate increase. In 2006, when rates were at 6%, people were still buying homes at a record pace. Furthermore, in the 1980s rates were in the double-digits. Even with the increase this week, interest rates are still near historically low levels, just not the lowest.