What Fed Funds Increase Could Mean For Real Estate

Federal Reserve

WASHINGTON–The Fed’s move to lift the target federal funds rate to between 0.5% and 0.75% was highly anticipated, and the market had priced in the increase during November, one analyst has noted.

Indeed, the 10-year Treasury rate is up 65 basis points since the election, which suggests the bond markets are moving well ahead of the Fed, said Steve Hovland, director of research for HomeUnion.

Hovland is projecting that in 2017 the Fed will raise the 10-year rate three times to a target range between 1.25% and 1.5%.

For real estate investors, higher interest rates have already arrived, and the cost of capital is expected to continue rising through 2017,” said Hovland.

“This could motivate investors anxious about purchasing single-family rentals to move sooner rather than later,” he said. “Since the week of the election, average 30-year mortgage rates from Freddie Mac for owner-occupied homes have climbed 60 basis points to 4.1%. Investors typically acquire loans at a 50- to 75-basis point premium from the agencies. Overall, higher interest rates will continue to put downward pressure on the homeownership rate as first-time buyers are priced out of the market. Sufficient rental demand will enable property managers to lift rents in virtually every major and secondary metro nationwide, except for the most heated housing markets and in markets where apartment construction is robust.”

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