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Opinion, commentary, and analysis on everything that makes the U.S. housing economy tick -- not to mention the ghosts in the machine, too. Written by HW's team of editors and reporters each business day.
Lending

Yes, the economy is finally ready for another interest rate hike

Here’s proof

October 27, 2016

Should the Fed raise the funds rate in December?

The answer is simple: yes. What is not so simple, however, is why they should raise rates.

A look at the economy will show that while conditions aren’t perfect, it is ready for a rate hike. We can see the market’s readiness in areas such as job growth, which increased by 156,000 in September, according to a report from the U.S. Bureau of Labor Statistics.

This is down significantly from last year’s growth of 229,000, however some experts said this is due to the market being at nearly full employment.

Again, the argument could be made that the market should be producing new jobs, however the economy is still growing, and at a pace that’s fast enough to warrant a rate hike in December.

Other factors show outstanding growth. Take, for example, new single-family home sales, which increased substantially in September, according to the latest release from the U.S. Census Bureau and the Department of Housing and Urban Development.

And don’t forget about that household income posted its first significant increase in eight years, data from the U.S. Census Bureau showed.  

That’s not to say there aren’t problems. Strained housing inventory and high housing demand is pushing home prices up, but even that may not be as bad as it looks.

When adjusting for inflation and the amount of purchase power provided by low interest rates, home prices actually dropped in the past 16 years, First American Chief Economist Mark Fleming said in an interview with HousingWire at the Mortgage Bankers Association annual conference.

Home prices are rising to levels not seen since the pre-crisis era, and yet buyer demand is unwavering – even growing.

As a Millennial who just graduated last December with my Bachelor’s degree, if I wanted to buy a home, I could be ready in just six months. This is despite the high home prices and student debt both working against me.

The economy is not in a state of crisis. While the rates might have needed to be lowered during the recession, it’s time to move on and increase rates. The economy isn’t perfect, but it’s good enough.

And I’m not the only one who says it’s time for rates to be raised. Fleming commented that the economy can’t sustain these low interest rates in the long term.

The minutes from the Federal Open Market Committee’s September meeting shows that several board members agree that the market needs a rate hike, and soon.

“We see a 75% chance of an increase [in December], roughly in line with market expectations,” a note from analysts at Goldman Sachs stated. “The remaining uncertainty relates to economic data and financial conditions, rather than uncertainty about the Fed’s reaction function—conditional on decent data and stable markets, a December rate hike looks very likely.”

Not only should the market increase interest rates in December, but most experts expect that it probably will. Perhaps a rate hike would even lead to a decrease in buyer demand, and therefore slow the rapidly-increasing home prices. Time will tell.

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