Yes, it happened. The Fed’s decision to raise rates for the first time in over a decade is a buzzing topic everywhere. A common concern floating around conversations is “how will the rate hike affect me?” While higher interest rates have a negative connotation to some, despite the unanswered questions for the change, there is much positivity to look forward to:
“The Fed is trying to maintain a ‘healthy’ economy. If the economy is ’very slow’ the Fed might decide to lower interest rates that will in turn make money more available to businesses, home buyers, and consumers,” explains Ethan Pope of Foundations for Living. This statement supports the belief that our country is indeed doing better right now. If the economy ever slowed down again–or we needed to change course in the future–we clearly now have the ability again to LOWER the fed rate, if needed.
So, what does the rise in interest rates really mean?
“Gradually” increasing rates:
Rate hikes seem intimidating, but it’s not as scary as we perceive it to be. The Fed stressed that “gradual” increases to rates will occur. The first move by the Fed will be small: “a maximum of about 25 basis points, or an increase to 0.25% from 0%. In the world of interest rates, that’s like bunting a baseball,” says CNN Money. This is definitely a positive since rates will still remain historically low for the foreseeable future!
Also as we can see, the market activity shows that the expected rate hike was already priced into the MBS market. After the announcement on December 16th, mortgage rates have actually become a tad better?! Again, another very positive sign:
Increasing Property Values:
As the FED gradually increases the rate over time, we can expect the domino effect to increase property values nationwide. How?
A higher yield on the new bonds = an increased demand for investment into those bonds = the bond (asset) itself appreciates = the derivative of the new bonds, aka your house/each individual house, all then naturally increase in value as well.
Increased property values has so many benefits to our industry, economy, and society:
- The increased value allows for people that were previously underwater (owed their bank more than the value of their house) to finally have enough equity to sell their houses and move on to their life goals = more real estate transactions nationwide.
- The increased value allows people to actually experience the benefits of the American Dream again, using their hard-earned equity on luxuries such as repairs and rehabs, HELOCs, college tuitions, new cars, or any other family needs = increased spending into the economy nationwide.
- The increased value (and stabilizing economy) also allows for the older and/or more established families, that had previous plans of expanding and maybe purchasing a 2nd/vacation home, to finally feel safe to move forward with their other life goals = more real estate transactions nationwide.
More lending options:
Lending came to a screeching halt after the market crash, as banks tightened the requirements to obtain a loan in order to help stabilize the industry and economy. Since then, access to credit has remained slim-to-none throughout the country.
With the FED’s recent decision, banks can feel the benefit in many different ways, and again open its doors to their communities. Banks can begin to increase their available lending options in many ways, which will naturally increase the number of Americans that can have an accessible pathway to their very own American Dream.
Fluid for our thirsty savings accounts:
For the past few years, interest rates on savings accounts have been next to nothing. People might forget that while they were paying record lows on their mortgage interest, they were also earning record lows on their savings accounts! Higher returns on savings accounts is definitely an unexpected benefit of rate hikes. Savers: we can start making a little money again!
What do you currently earn on your savings account and/or money market?
Protection from high inflation:
Vastly growing or recovering economies often seem appealing at first, but high inflation often causes the confidence in the currency and economy to decline, making it less appealing to domestic and foreign investors. Therefore, high inflation often has a harmful effect on economic growth.
When interest rates are on the rise, companies are then able to continue normal daily operations with their investments and savings accounts, rather than one of their major alternatives: increasing the price of their products and services to us, the end consumer. You don’t want to spend $6.00 on a loaf of bread, do you?
The truth is while most are worried about the FED’s decision to increase, it turns out that we might experience more positives than anyone expected!