The Federal Reserve's Federal Open Market Committee (FOMC) voted to raise the target range for the federal funds rate by 25 basis points, to between 1.75 percent and 2 percent. The federal funds rate influences consumer interest rates on everything from mortgages to auto loans and credit cards.
Given the overall strength of the U.S. economy right now – unemployment is near historic lows, wage growth is steady and inflation is holding at or near desired levels – the Fed’s decision to raise short-term interest rates is not surprising and was widely expected. There is some fear that recent fiscal and trade policy decisions could slow the U.S. economy, bringing about more uncertainty about what the Fed will do over the next year. Longer-term lending rates, including mortgage interest rates, do sometimes move in the wake of these hikes, but many lenders have already priced this change into their quotes. Home shoppers in 2018 have already seen mortgage rates climb fairly dramatically from the historic lows of the past few years. Most buyers so far have largely been able to absorb the increased monthly costs that come with higher interest rates, but at some point the combined cost of higher home prices and higher rates will begin to limit what home shoppers can afford to spend. The decision to buy or rent a home is rarely driven by financial considerations alone, but sharp movements in mortgage rates can shift the price point that home shoppers target. Deteriorating affordability may lead some buyers to lower their overall buying budget, increasing demand – and prices – for the types of less-expensive homes that are already highly sought after. The most expensive markets, notably in California, are most exposed to these dynamics.
