Weekly Rate & Market Update 12-16-16

Question: Does the Fed raising interest rates Wednesday affect me?

Answer: The last time we answered this question was last December, the last time the Fed increased its Federal Funds Rate. The answer on how the rate hike by the Fed earlier this week is no different than the answer when the Fed raised the fed funds rate last December.

How much will the rate hike affect you? Depending on the type of debt you have either a little or not a lot in the short term, longer term based on the Fed comments with the rate increase you could be impacted more in 2017 and beyond.

The actual increase by the Fed was from between 0.25% to 0.50% to now being between 0.50% to 0.75%. So the Fed is still not charging member banks 1.00% to borrow money.

Virtually none of your consumer, or if you are a business owner your commercial, debt is directly impacted by the Fed rate since you do not borrow from the Fed. However the rate that is generally tied to the Fed rate may impact you: the Prime Rate.

Contrary to common belief, there is no official “prime rate”, each bank may set its own but generally the consensus moves all banks rates to the same number. The Prime Rate is the rate that banks charge their best and most credit worthy clients. It almost always moves in the same direction and in the same amount that the Fed funds rate moves. Once the Fed moves the funds rate banks immediately increase their Prime Rate, why charge 3.5% when everyone else is charging and getting 3.75%?

The increase on Wednesday of the funds rate led to an increase of 0.25% of the Prime Rate from 3.50% to 3.75%. This was only the second increase in the Prime Rate since 2006, with the last increase coming in December 2015 from 3.25% to 3.50% and the prior increase was June 2006 when the Prime Rate moved from 8.00% to 8.25%. In June 2006 not only did the Prime Rate hit a cyclical peak, being the highest since 2001, but peaking were also housing prices, stock markets and GDP before the Great Recession.

Those consumers who are most immediately impacted by the increase in the Prime Rate are those who have lines of credit, more specifically for homeowners, those who have Home Equity Lines of Credit. Almost every HELOC interest rate is tied to the Prime Rate, either Prime plus a margin, minus a margin or just plain Prime. So when the Prime Rate increased on Wednesday by 0.25% so too did the rate you are paying on your HELOC. This means your monthly payment is increasing accordingly.

Some consumer credit cards are also tied to the Prime Rate, in which case the rate you pay for your Visa or MasterCard will also increase, resulting in an increase in your minimum monthly payment.

The net monetary impact is not tremendous to most people. If you owe $100,000 on your HELOC and your rate is equal to prime your minimum payment has increased from $292 per month to $313, a $21 increase.

Longer term those who may be impacted are those who still have adjustable rate mortgages. Slowly the Fed hike can begin to move the benchmark rates that are used for ARMs, those being the LIBOR or U.S. short term Treasury notes. It is important to note that these rates move independently of the Fed and also banks’ prime rates, however as the rate environment increases these rates will follow. This also means that the cost to maintain government debt, federal, state and local bonds will be increasing, meaning it will take more tax dollars to pay the interest on borrowed money.

As for fixed rate mortgages the impact is negligible for the current increase. With all the talk, speculation and predictions of a rate increase by the Fed the increase was priced into mortgage rates some time ago by investors purchasing Mortgage Backed Securities (MBS). As anticipated the immediate reaction in the MBS markets following the increase was a jump in MBS prices (lower rates).

Looking forward, however, there is an impact on fixed mortgage rates as the Fed announced it anticipates three more rate hikes in 2017 with each increase being 0.25%. Because of this announcement investors will start pricing these anticipated increases which will put upward pressure on all interest rates, including mortgage rates. Baring an economic downturn (which I am on the record predicting for around the middle of 2017) mortgage rates probably have seen their floor this past year.

If you have a HELOC the then rate increases next year will raise the Prime Rate basis for your interest rate from 3.50% to 4.25%, increasing the repayment on $100,000 from $313 per month to $354 per month.

One other impact of the rate hike for consumers, you should see a slight bump in the rate your bank pays on your savings or money market account—perhaps paying up to a full one percent, one and a half?

Looking forward rates on consumer debt for credit cards and auto loans will see increases with the increase in the Prime Rate and rates in the Treasury and mortgage markets.

So to paraphrase that great writer, overall the Fed hike is much ado about nothing in the short term, a small increase in some people’s payments but for most no impact at all.

Have a question? [email protected]

Remember, with Dennis it’s not just a mortgage, it’s your complete financial picture.

The Fed news casts a long shadow over other economic news released this week, but even in the shadows the data released this week shone a bit given its significance. Both the Producer and Consumer Price Indexes for November were released. PPI increased 0.4% for the month and 1.3% for the year, exceeding expectations and stronger than we have seen in several months. CPI lagged increasing only 0.2% after 0.4% increase in October but year over year the increase is 1.7%, a big part of the increase being housing costs. The news for the price increases are mortgage rate unfriendly as they show inflation momentum which supports higher rates in the future to temper inflation.

Retail sales had interesting data for November. Overall growth was only 0.1%, not a good number. The total number was dragged down by auto sales which fell 0.5% for the month, but a lot of strength from restaurants which rose 0.8% for their biggest gain since February. Also strong were furniture and furnishings. The latter two data sectors are important as they are generally discretionary spending showing consumers feel confident by spending beyond essentials. Overall the big number is positive for mortgage rates, however the details of the report is not as positive forecasting possible strengthening consumer spending.

Rates for Friday December 16, 2016: I have a service that texts me the movement of Fannie Mae Mortgage Backed Securities (MBS) throughout the day. A normal day may have updates every hour as schedule, up 5 basis points (bps), down 4 bps, small normal movements of a calm market. Since the election we have had some days where the message is up 20 bps, down 16 bps, up 19 bps, etc. indicating rates moving up and down. Wednesday following the Fed rate hike announcement I was in my weekly Rotary lunch meeting and my phone was lighting up, as the MBS fell being down 21 bps for the day, down 43 bps, down 52 bps, 64 bps, 79 bps, 86 bps, finally closing down 89 basis points for the day. Wow, a run straight down meaning rates shooting up through the day based not on the Fed rate hike which was priced into the market but because of the announcement of more hikes in 2017. For those waiting for lower rates that ship has probably sailed. I have missed this market completely. I thought we would see a flight to safety with a Trump election due to uncertainty but the exact opposite has happened as investors flee the safety of bonds and mortgages and have been buying equities. Looking forward there no longer appears to be any large correction to lower mortgage rates short of a possible recession in the future. Rates are up 0.75% in the past six weeks.

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS
30 year conforming 4.125% Up 0.125%
30 year high-balance conforming 4.25% Up 0.125%
30 year FHA 3.50% Up 0.25%
30 year FHA high-balance 4.00% Up 0.25%

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down (3.5% for FHA) with 740 FICO score for purchase mortgages.

A celebratory week for us. First, tomorrow is our annual company party. I am so proud to work with the great people at Stratis Financial. The opportunity to celebrate another great year of helping families with their mortgage needs while working with professionals who are the best in the business and do so in a relaxed fun atmosphere is something for which I will always be grateful.

Speaking of grateful another, and more personal and special, celebration will be held next Wednesday as Leslie has a somewhat significant birthday. Not less than a few years ago we had a big celebration for her 39th birthday and have been celebrating anniversaries since. This summer we through another big celebration for early celebration for this birthday since it is hard to have a party four days before Christmas. I am so grateful to have been able to say, Happy Birthday to my wonderful wife for what will be the 23rd time. Happy Birthday Leslie, so proud to be your husband!

Have a great week,

Dennis