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Fed continues to send signals on looming interest rate hike

So, what does it mean for the mortgage market?

Crystal ball

It appears that the Federal Reserve is continuing its tact of jumping through as many hoops as possible to prepare the market for the potential of another rate hike.

Last year, the Federal Reserve sent numerous signals before finally increasing the federal funds rate in December. That increase was the first Fed rate hike in nine years.

In the last few months, the Fed has taken a similar approach, leading some to believe that another rate hike could be coming before this year is over.

Last week, for example, Fed Chair Janet Yellen hinted that a rate hike may even be coming as soon as next month, while others interpreted her comments as more evidence the Fed could hike rates in December, just as it did last year.

The Fed laid a little more groundwork this week, when Fed Vice Chairman Stanley Fischer told Bloomberg TV (as reported by Reuters) that the country’s job market is “nearly at full strength” and said that the Fed’s decision to raise interest rates will depend on the performance of the economy.

From Reuters:

In an interview with Bloomberg TV, Fischer did not comment on the timing of the next Fed rate hike but said "we choose the pace on basis of data," and that U.S. "employment is very close to full employment."

Fed Chair Janet Yellen said on Friday she thought the case had grown stronger in recent months for an interest rate increase, remarks that Fischer later that day said were consistent with a view that the U.S. central bank might raise rates at its next policy meeting in September.

So, what happens to the mortgage market whenever the Fed actually does raise rates?

Well, according to Jeff Taylor, managing partner and co-founder of Digital Risk, the Fed’s continued efforts to telegraph its intentions to raise rates should be a positive for the mortgage market for the rest of this year, assuming buyers can actually find homes to buy and are able to afford them.

According to Taylor, the Fed’s messaging means that there should be an increase in mortgage refinancing this fall as borrowers prepare for higher rates in 2017, but Taylor cautions that rates have been historically low for so long that most people who want to refinance have already done so.

Taylor said that there could be an increase in purchase applications as buyers lock in rates before they go up, although recent reports from the Mortgage Bankers Association suggest that mortgage applications are stagnating.

One reason for that stagnation and a potential headwind to any potential increase in purchase applications is that buyers need to be able to find a house to buy, a big problem in markets with low inventory, Taylor said.

That’s evidenced by the latest data from S&P CoreLogic, Case-Shiller Indices, which came out earlier Tuesday.

The latest Case-Shiller report shows that home prices continue to rise nationwide, and that the inventory of homes available for sale is down significantly.

“The data from the first half of 2016 is in, and thus far, the relentless sellers’ market we’re in the midst of shows few signs of reversing,” Zillow Chief Economist Svenja Gudell said in reaction to the Case-Shiller report. “The overall inventory of homes for sale is way down, national home values continue to rise and those homes that are available to buy are selling seemingly as soon as they hit the market.”

Taylor also notes the impact that increasing prices are having on buyers.

“Affordability of homes is a huge problem since home prices have risen so much faster than wages,” Taylor said. “This will only get worse if mortgage rates go up in 2017, which could slow the market.”

But Taylor provides a note of optimism on the Fed’s looming rate hike.

“However, if the Fed raises rates, that's an indication of a healthier economy, which in turn provides more consumer confidence and encourages people to buy homes,” Taylor said.

Overall, Taylor said the prospect of a rate hike means that mortgage lenders should be getting ready a “much stronger mortgage market” during the fall and winter, seasons that usually slower from a home buying perspective than spring and summer.

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