The Federal Reserve’s decision Wednesday to raise its benchmark short-term interest rate will slowly push up rates on everything from mortgages and credit cards to savings accounts.
The Fed increased its federal funds rate by 0.25 percentage points. It was only the second increase in more than a decade. Chairwoman Janet L. Yellen said at a press conference that the economy had shown enough improvement in the last year to warrant higher increases and projected three more rate hikes in 2017.
Here’s how the rate hikes will affect your pocketbook.
Mortgage rates are already historically low and the Fed’s short-term rate bump — which indirectly affects mortgage rates — is not likely to make a big difference in the next few months. But, subsequent hikes by the Fed in 2017 could start to really add to the cost of a home.
Zillow and other industry watchers say mortgage rate increases have more of an impact in costly home markets, like San Diego County.
Rates have already gone up since president-elect Donald Trump’s victory.
Since the day before the election, the cost of a typical San Diego County home increased by $50,400 over the course of a 30-year fixed rate mortgage with 20 percent down.
The median home price in the county, $507,500, hit its highest point in a decade in October. Mortgage rates were 3.59 percent the day before president-elect Donald Trump’s victory, rising to 4.19 percent Wednesday, said Mortgage Daily News.
Mortgage rates typically track the yield on the U.S. 10-year Treasury. That yield has risen sharply since the election as investors take money out of bonds and put it in the stock market. However, the bond market could still change course as investors become less bullish on stocks.
Erin Lantz, vice president of mortgages for Zillow, said coastal California will feel the impact more than, for instance, much of the Midwest.
“Those higher price markets are where even moderate increases in rates can be felt more significantly,” she said.
Lantz said higher interest rates could slow home price increases, but it is not likely prices will go down. She stressed interest rates were still at historic lows and there does not seem to be any drop in purchase loan requests on Zillow.
However, subsequent rate increases could make more of a dent.
Lawrence Yun, chief economist for the National Association of Realtors, predicted Wednesday after the Fed announcements that the mortgage rate would be in the 4.5 to 5 percent range for a 30-year fixed rate mortgage at this time next year.
Randy Goodman, CEO of Accretive Investments, said at a real estate conference last weekat the University of San Diego that even though interest rates have an effect on San Diegans, there are non-local buyers who can prop up the market.
He identified foreign buyers and so-called "baby chasers," parents who move across the nation to be with adult children who recently had kids of their own, as people ready to pay higher rates.
Current car owners paying off a fixed-rate loan will not be affected by any rate increase, but new shoppers looking to buy could pay more — but not much.
The average interest rate for a new car was around 4.26 percent in early December and 4.79 percent for a used car, said Bankrate, a financial website that tracks loan rates.
Greg McBride, chief financial analyst for Bankrate, said people looking to purchase a car shouldn’t lose sleep over interest rate changes.
“The difference of a 0.25 percentage point for somebody looking to borrow $25,000 is $3 a month,” he said in a Facebook video. “So, nobody is going to have to downsize from the SUV to a compact.”
More Fed increases next year, though, would make these loans more costly. While auto loans are not a huge part of the economic puzzle, Lantz said increases in various parts of the economy mean less disposable income for basic items, and people could put off big purchases.
Savings accounts and CDs
If you like to save money, you’re happy to see any rise in interest rates. But don’t get too excited because Wednesday’s move will have a marginal impact on your nest egg.
Rates on many savings products are still in the basement — down nearly 6 percent since 1990. Consumers are still lucky to find a savings account with 1 percent rates.
Savings accounts and certificates of deposit, or CDs, benefit from high yields and could become more of a factor if the Fed continues to raise rates.
“If this signals the beginning of more rate hikes to come, then I think you will begin to see meaningful increases in the yields people are earning,” said Claes Bell, Bankrate researcher.
Money market accounts, a subset of savings accounts, have historically performed much better. The yearly yield was 5.98 percent in 1990, said Bankrate. By 2000, it was down to 2.07. Today, the average rate on a money market account is 0.11 percent, with the best rates usually coming from credit unions. Rates in San Diego County range from 0.01 to 0.05 percent, according to Bankrate.
If you have a credit card with a variable rate or a home equity line of credit, you’ll feel Wednesday’s Fed move pretty quickly.
Average credit card interest rates are about 16.28 percent, while home equity lines are about 4.78 percent, says Bankrate. And banks will pass along that quarter-point increase in the fed funds rate to consumers in a few weeks. So, it will make sense to pay this type of debt off before rates get too high or get into some sort of fixed-rate repayment.
“The cost of carrying that debt every month is going to get heavier and heavier,” Bell said.
The average San Diego County resident was $26,266 in debt in October, according to credit monitoring company Experian. That can include mortgages, student loans and credit cards.
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Rising mortgage rates appear to be the new normal, and the market for home loans is still adjusting.
Total mortgage application volume fell 4 percent on a seasonally adjusted basis last week from the previous week, according to the Mortgage Bankers Association. While rates didn't rise much during the week, the new range is clearly pricing out some buyers and more refinancers.
Applications to refinance a home loan fell 4 percent, seasonally adjusted, and average refinance loan sizes declined. Given how low mortgage rates have been for so long, today's refinancers are highly rate-sensitive; even the slightest move higher in rates keeps more borrowers from being able to benefit from a refinance. Refinance applications are 12 percent lower than the same week one year ago.
The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) increased to its highest level since October 2014, 4.28 percent, from 4.27 percent, with points decreasing to 0.36 from 0.37 (including the origination fee) for 80 percent loan-to-value ratio loans. The average rate for larger, jumbo loans, rose even higher.
"While jumbo 30-year fixed rates have been a bit slower to increase compared to overall fixed rate mortgage rates in recent weeks, they increased 7 basis points last week to an average of 4.29 percent. At the same time, the average five-year ARM rate declined by 11 basis points to 3.28 percent, which may provide an alternative outlet for jumbo borrowers," said Lynn Fisher, MBA vice president of research and economics.
Mortgage applications to purchase a home, which are less rate-sensitive, still lost ground, falling 3 percent for the week. Purchase applications are now just 2 percent higher than the same week one year ago. Some argue that higher rates are taking their toll, but it is likely that higher home prices and short supply are weighing on homebuyers more than interest rates. There is also the fear that rates will move higher. The Federal Reserve is widely expected to raise its benchmark interest rate on Wednesday. While mortgage rates do not follow the Fed exactly, they are guided by Fed policy.
"Mortgage rates will more readily respond to shifts in the outlook, and [Wednesday's Fed] meeting can inform that outlook via the Fed's economic projections as well as [Fed Chair Janet] Yellen's press conference," said Matthew Graham, chief operating officer of Mortgage News Daily.
Diana OlickCNBC Real Estate Reporter
By Barbara Pronin
Identity thieves, like cold germs, seem to be all around us, using stolen Social Security Numbers (SSNs) and other personally identifiable information (PII) in schemes to line their pockets while ruining the victim’s credit and financial standing.
When PII falls into the wrong hands, crooks can use that information to open and use new accounts, get medical care or other services, and wreak all kinds of financial havoc on unsuspecting prey. Clearly, protecting our confidential information is as important (if not more so) as protecting ourselves against the common cold.
The Federal Trade Commission (FTC) suggests several ways to keep confidential data safe:
Barbara Pronin is an award-winning writer based in Orange County, Calif. A former news editor with more than 30 years of experience in journalism and corporate communications, she has specialized in real estate topics for over a decade.
DAILY REAL ESTATE NEWS | MONDAY, DECEMBER 12, 2016
Home prices are rising in most areas, but a few large metro areas are seeing some big price reductions that may be opening the door to some home buyers this winter.
“Despite the fact that home prices are now setting new records in most of the country, price reductions on listed homes are quite common,” says Jonathan Smoke, realtor.com®’s chief economist. “A price reduction can happen for lots of reasons, including adjusting an unrealistic initial price, a new sense of urgency, or motivation by a seller, or declining market trends.”
Realtor.com®’s research team analyzed 300 of the largest metro areas and determined the share of homes for sale that saw price reductions in the past year.
The following top 10 markets have had the most price cuts:
Billionaire investor Bill Gross is skeptical that the post-election Trump rally is here to stay.
In his latest monthly investment outlook, the bond guru warned that while the President-elect's business-friendly stance on regulations and taxes has helped push stocks to record highs in recent weeks, his protectionist instincts could prove harmful in the long run.
"There’s no doubt that many aspects of Trump’s agenda are good for stocks and bad for bonds near term – tax cuts, deregulation, fiscal stimulus, etc," noted Gross in his outlook published on Tuesday.
However, as he goes on to note, "longer term, investors must consider the negatives of Trump’s anti-globalization ideas which may restrict trade and negatively affect corporate profits," wrote Gross.
The strong dollar also continues to be a headwind for companies that do a significant portion of their business abroad, as Gross points out, and has weighed on Corporate America's bottom line.
The famed investor, who manages the $1.7 billion Janus Global Unconstrained Bond Fund, has long been critical of the Federal Reserve and its decision to keep rates low for so long. Lately, he's taken to criticizing Trump and the efficacy of his stated policies.
For instance, in his outlook, he took a jab at some of the lingo that's been thrown around in the wake of the fellow billionaire's election that sounds nice but fails to capture the whole equation.
"Begin to emphasize 'fiscal' as opposed to 'monetary' policy, but never mention Keynes or significant increases in government deficit spending," wrote Gross. "Use the buzzwords of 'infrastructure' spending and 'lower taxes.' Everyone wants those potholes fixed, don’t they? Everyone wants lower taxes too!"
Gross has previously said he didn't vote for either major party candidate in the election.
In light of the stock market downturn that Gross is expecting, he recommends investors increase their cash allocations and set bond durations below benchmark targets in anticipation of higher rates.
Gross also took the opportunity to compare the nation's global debt crisis with the nation's high incarceration rate. In both scenarios, he says, there's a certain imprisonment. There's also no quick solution.
"On TV, 'Orange Is the New Black' yet, in the markets, 'Red' (in some cases) may be the new 'Green' when applied to future investment returns," wrote Gross. "Be careful – stay out of jail."