What’s up with the Fed rate hike…
This week’s news from the Federal Reserve about hiking the Fed interest rate a quarter of a point came as good news to the stock market. Many articles have come out recently, mostly lauding the Federal interest rate hike. But what about the effect on property investors? How will this first interest rate hike in nine years affect the average landlord? Well, consider it a mixed blessing, with a little bit good, and a little bit bad. On the whole, if you have properties that already have fixed rate mortgages, this decision should have no effect on your monthly cash flow. However, if you are using any adjustable rate mortgage, or home equity line for borrowing purposes, then you can expect to be taking a hit on the borrowed funds already taken out, as your monthly mortgage payment will indeed be going up.
A reflection of an improving economy
I had already reported here early this year how the improving economy would have an impact on the overall rental market. I had said that “with lower oil prices, and more disposable income made available, the economy can’t help but pick up speed in 2015. With this, consumer confidence will edge up, still slowly, but definitely upwards. As the unemployment rate continues its trend of ticking downwards, even with the greater stratification between the haves and have-nots in our country, job creation will also continue to increase slowly, but demonstratively. This will result in an improved housing market overall. Already, over the past year, many cities have shown house pricing gains in the 10 to 15 percent arena. Expect much of urban and suburban US communities to continue to see this type of increase in housing appreciation in 2015. However, rural areas will continue to lag behind in growth rate.”
How raising interest rates was reported
In an article from MSN.com (“Seven Ways The Federal Reserve Rate Hike Will Affect You in 2016, by Laura Woods, 12/16/15), the author noted that “after much speculation, the Federal Reserve announced Dec. 16, 2015, that it would raise interest rates for the first time since June 2006. The Fed rate hike means the target funds rate range that was 0 percent to 0.25 percent will increase to a range of 0.25 percent to 0.5 percent. Federal Reserve System Chair Janet Yellen said the decision to raise rates was due to strong economic recovery and the fact that the labor market has shown major improvements.”
The author went on to explain that some mortgage holders will feel the pinch, noting that “contrary to popular belief, not all mortgage rates are directly related to the decisions of the Federal Reserve Board. Adjustable rate mortgages and home equity lines of credit will be most impacted by the Fed rate hike, but most 30-year, fixed-rate mortgage rates are based on the 10-year Treasury bond, according to The New York Times. Prices are determined according to a number of factors, including long-term economic growth, inflation outlook and short-term interest rates. If you have an ARM that currently has annual readjustments or will soon, you might want to consider refinancing it to a fixed-rate mortgage now because doing so could save you a significant amount of money in the future. Conversely, if your adjustable-rate mortgage rate is locked in place for a few years, it’s probably best to wait and see what the future holds. HELOCs will likely rise with the Fed funds rate to an approximate average of 5.5 percent, reported The New York Times. Locking in a fixed rate tends to result in a rate increase, so take the size of your loan and the amount of time you plan to pay it off into consideration before making a move.”
In addition, expect a couple more, regular future increases of about a quarter point at a time to follow, through the next year or so. Obviously, this will make future investment property acquisitions more expensive to finance as we move forward. And your cash flow projections should certainly take this current increase into account.
In a separate article on the rate hike in Reuters (Fed Raises Interest Rates, Citing Ongoing Economic Recovery, by Howard Schneider and Jason Lange), the authors pointed out that “the Federal Reserve hiked interest rates for the first time in nearly a decade on Wednesday, signaling faith that the U.S. economy had largely overcome the wounds of the 2007-2009 financial crisis. The U.S. central bank’s policy-setting committee raised the range of its benchmark interest rate by a quarter of a percentage point to between 0.25 percent and 0.50 percent, ending a lengthy debate about whether the economy was strong enough to withstand higher borrowing costs.
The writers then went on to quote the Fed directly as to the reasons for the move, saying “the Committee judges that there has been considerable improvement in labor market conditions this year, and it is reasonably confident that inflation will rise over the medium term to its 2 percent objective,” the Fed said in its policy statement, which was adopted unanimously. The Fed made clear that the rate hike was a tentative beginning to a “gradual” tightening cycle, and that in deciding its next move it would put a premium on monitoring inflation, which remains mired below target.”
The upbeat news
On the positive side, any interest rate hike has an automatic dampening effect on the housing market. Though a quarter point will probably not force droves of potential buyers to the sidelines just yet. However, if you already have rental residential units as part of your investment property empire, then this Fed interest rates increase will be a boon overall. As some buyers decide to stay put and continue to rent for a longer period instead of getting into the home buying phase of their lives, there will naturally be an upward pressure felt on rents.
This can only help increase your cash flow in the coming year or two. After all, more rental demand equates to higher rents. So the Feds raising the rates is not going to be all bad news. The hike in rates in relationship to property investing will still be relatively small, and after all, it is a sign of our economy slowly becoming more robust. I wouldn’t expect any major credit crunch in the process either, and banks should retain the same lending requirements as before.
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