There are only 2 answers to this question that leave no room for debate - "it doesn't" and "we'll see". Informative, right? The reality of the Fed's December decision to raise the Fed funds rate for the first time in nearly a decade has been expected for some time, and comes on the heels of numbers that portray a strengthening economy, a healthy job market, and at least some level of Fed rate hikestability across the spectrum of our economy. Many prognosticators are offering up opinions on what will happen, but the truth is, no one knows where we go from here.
The economy we've seen over the past decade is one of uncharted waters. The Fed has implemented as many controls as it could muster in that time in an effort to stabilize what was once a market in complete self-destruction. Some of these controls had intended results. Others did not.
From here, a couple of scenarios could play out, along with many more that fall in the middle, somewhere between these 2 possibilities. One scenario is that the economy continues to improve, and a private market for mortgage backed securities recreates itself. In this scenario, stocks improve (along with the economy as a whole- largely dependant on wages and inflation), and interest rates on mortgages steadily increase, held in check by competition, but increasing to keep in check with overall economic conditions.
Another scenario (and the one I think is closer to reality) is that the Fed's rate increases reveal that all that has glittered over the past few years hasn't been gold - meaning the large gains in the stock market and the economy as a whole are largely (or solely) the result of unlimited quantities of almost free-money being available for nearly a decade. Think about it. If you could borrower unlimited funds and pay between 0-.25 percent, do you think you could turn a hefty profit on that money? You'd be a pretty poor investor or business person if you couldn't. What about when that borrowing rate moves to 2, 3, or 4 percent? Things would be a little tougher, and would require savvy and favorable market conditions. In this scenario, the rate hike hinders the folks that have been making a killing playing the market with Monopoly money, and "trickle down" economics come into play, resulting in layoffs, slowed development, and possibly another recession, or at least continued stagnation - market conditions that bring about those same low interest rates we've seen over the past 5 years.
There are innumerable possibilities between these 2 scenarios, and outside factors will impact the mortgage interest rate atmosphere - including stocks, commodity prices, and geopolitical events. As things unfold though, the mortgage markets should remain largely in-check and similar to those we've seen for the past 2 years, at least for the most part. Any increases to mortgage rates were largely already factored into the marketplace ahead of the Fed's announcement, as trading has run rampant over the past year as the Fed's decision seemed to transition from "if" to "when".
One thing is for certain going forward, the Fed has shown that it would like to end the free money party sooner rather than later, and if they think they can, they will. This first rate hike should be a wake up call to the marketplace that it needs to figure itself out. As rates increase, those who have been drunk on free money need to sober up, and adapt to a new reality - because the Fed has made it clear, the party is over.
For the short term, though, mortgages, rates, and product offerings won't be changing, at least not any more than they have been the last 6-12 months, which means continued volatility, but no major changes to the mortgage landscape.
POSTED BY
John Meussner
NMLS# 138061
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