By Steve Hovland
Director of Research
The expectations of a December rate hike by the Fed soared after the U.S. economy grew at a 2.9 percent annualized rate in the third quarter. Expectations of economic growth were 2.6 percent. As a result, the 10-year Treasury rate climbed to the highest level in five months, putting upward pressure on mortgage rates. Although the Federal Open Market Committee will consider the October and November jobs reports before their mid-December meeting, a resumption of normalizing monetary policy after a year-long hiatus is highly probable. Therefore, the era of record-low mortgage rates will begin to come to a close in the coming months.
Many of the headwinds that concerned the Fed during the winter and spring periods has softened. China, for instance, has shown three consecutive quarters of relatively stable growth. The consequences of the United Kingdom’s vote to sever ties with the European Union, colloquially nicknamed Brexit, have also been overblown to this point. The U.K. posted GDP growth of 0.5 percent in the third quarter, surpassing expectations. As a result, the expectations for a rate hike in December has climbed to approximately 80 percent.
The 10-year Treasury rate, which the Fed hopes to dictate through the federal funds rate, has moved up ahead of action by the FOMC. Over the past month, the rate has climbed 30 basis points, which will provide an immediate impact on long-term interest rates. For both single-family rental (SFRs) investors and first-time buyers, higher interest rates will further tighten inventory across the nation. Fewer SFR deals in fewer areas will pencil out, requiring additional due diligence on the part of buyers.
Rising rates will also be a drag on the owner-occupied side of the housing market, particularly if the Fed moves twice before the buying season kicks off next spring. The autumn and winter months typically see lower home prices as fewer buyers participate in the market. These seasonal lower prices will offset the strain on the housing market applied by higher rates, so the impact on housing will be most pronounced several months from now. In the meantime, the recent increase in the homeownership rate is expected to be a blip on a downward trend that extends into 2017.