Technology TransactionsHow Real Are Interest Rate Worries?
The .25 percent rise in the Federal Reserve Board"s discount and federal funds rates are neither dramatic nor unexpected. Bright people, and even Wall Street analysts, have been expecting such increases for months.
The federal funds rate, now at 1.25 percent, is the rate banks pay for overnight borrowing. The discount rate, now at 2.25 percent, is the rate banks pay to borrow from the Fed.
It"s amazing to hear the reaction to the Fed move. Credit card rates will have to rise, we are told -- as if 18 to 21 percent is somehow insufficient. And real estate will be largely unaffected, say the seers.
Will a quarter-percent rate hike change much of anything? Nope. Not hardly. But if the idea is to slow down a booming economy, one would first have to ask: What booming economy?
It"s true that the gross domestic product rose at an annualized rate of 3.9 percent in the first quarter. And it"s also true that employment rose by 112,000 jobs in June.
Here"s what"s also true:
There will be more rate increases by the Fed. Why? Because a .25 change will not shift spending and investment patterns. It is these additional rate increases which will impact spending habits.
Job increases are great -- but they have not kept up with population growth. We added 112,000 jobs but the unemployment rate remained stagnant at 5.6 percent. The number of unemployed actually increased from 8,203,000 to 8,248,000 people. And that"s not counting 1.5 million "persons not in the labor force" as unemployed.
Keep your eye on wage rates. According to the Bureau of Labor Statistics, "Over the year, average hourly earnings grew by 2.0 percent, and average weekly earnings increased by 1.7 percent." Logic this out: If hourly earnings are up and weekly earnings are up less, it must mean people are working fewer hours. Why would firms increase employment if workers are now underutilized? There are politics involved in these numbers and an election in the near future. Partisans for one side or the other will skew each tidbit of information to support their preferences and prejudices.
But while the political class debates which set of millionaires will lead the nation, most people have more immediate concerns, especially interest rates and job hours.
Consider this news release issued in May:
"The 9,116 commercial banks and savings institutions insured by the Federal Deposit Insurance Corporation (FDIC) earned a record $31.9 billion in the first quarter of 2004, marking the fifth consecutive quarter that industry profits set a new high."
This is great news for the banking system -- but not everyone is doing so well. Increasing weekly wages by 1.7 percent means folks are ahead of inflation (0.6 percent) but not by a significant or substantial amount. No less important, gas is up 7.7 percent and food is up 1.4 percent.
The concern then is not with the measly .25 percent rate increase announced by the Fed. The concern is down the road six months or a year: How much will the Fed push for higher rates?
It"s possible that things could work out nicely -- we have had a remarkably good run for the past 20 years. But higher interest rates will inevitably slow spending throughout the economy, a reality which has major implications for real estate.
The sense here -- for what it"s worth -- is that we are unlikely to see the levels of price appreciation witnessed in many areas during the past few years. Population demand will help, job growth in selected areas will be an asset, but higher loan costs will limit price increases and unit sale volume.
According to Freddie Mac, mortgage rates have just fallen to a 10-week low. At this moment, short-term rates are rising while long-term rates are moving downward. Thirty-year fixed-rate loans are now available at 6.01 percent while 15-year mortgages can be had at 5.42 percent -- both with .6 points.
Are we seeing a blip in the mortgage market or a trend of some sort? No one knows. But what we do know is this: There are still a lot of folks out there who have not recently refinanced or who have adjustable-rate mortgages. At the very least, sit down with a loan officer to see what"s available with fixed-rate loans -- at today"s rates they might be a very good hedge against higher future costs. And if you"ve been thinking about buying a home, chat with a broker -- today"s rates are the best in several months and perhaps better than what"s coming.
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