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4 Reasons Why Higher Interest Rates Should Not Concern You

by James Bellandi

Higher interest rates may not be that big of a threat to housing’s future, after all

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With interest rates seeing their first increase since 2008, there is concern that the hike will harm the housing market either through harming sales directly, or by influencing buyer perception indirectly.

However, Freddie Mac does not share those concerns, and for a variety of reasons:

1. The Fed Knows the Economy is Fragile – One of the most common concerns is whether or not the economy can withstand a hike. No entity, Freddie argued, knows that better than the Federal Reserve. One of the things that the Fed stated when increasing rates was that it was only making small, careful adjustments to rates in the upcoming year so as not to destabilize the economy. Freddie expects the Fed to stick to its word with only a few modest upticks over the next year.

2. A Strong Dollar and a Weak Global Economy – Oil prices are plummeting, and economic problems in China, Europe and South America have caused the U.S. dollar to strengthen on other currencies. Both of these factors, Freddie said, will provide the Fed with incentives to moderate the interest increases as the U.S. attracts more global capital.

3. How Connected are Long-Term and Short-Term Rates? – One interesting thing Freddie notes is that the connection between the Fed’s short-term rates and housing’s long-term mortgage rates can be tenuous. For example, from 2003 to 2007, the Fed raised rates 17 times, hiking them from 1 percent to just over 5 percent. However, during that time, 30-year fixed rate mortgages remained static at 6 percent. If a 4-percentage-point increase didn’t budge long-term rates, Freddie asked, can 0.25 percent?

4. Housing will Grow Regardless – New home sales have consistently seen new post-boom peaks throughout 2015, and with no signs of stopping. The housing market, thus, seems on track to grow, regardless of the interest rate changes.

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