Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, said interest rates could increase this June based on generally better conditions in the market, reports Reuters.
Should the housing industry be worried as it could get hurt by the impending interest rate hike?
Fed's 'Strong Case' for the Hike
Included in the list of experts who expects Fed would raise short-term rates, but in September, is Scott Minerd, the global chief investment officer of Guggenheim Partners, reports TheStreet. "I think the Fed will take preemptive action so that it can't be accused later of falling behind the curve," Minerd told the outlet.
Lacker stated that improvement on consumer spending, the labor market and other economic conditions make a valid reason for an increase.
"Given what we know today, a strong case can be made that the federal funds rate should be higher than it is now," Lacker said in a statement for the Greater Richmond Chamber of Commerce.
"I expect that, unless incoming economic reports diverge substantially from projections, the case for raising rates will remain strong at the June meeting," he added.
It seems that if there would be a rate hike, it will only be incremental. Lacker explained, "Raising the funds rate target a notch or two is less like taking away the punch bowl and more like just slowing down the refills.We will still be spiking the punch, just not quite as rapidly as we have been."
This is in line with Warren Buffet's expressed opinion mentioned in another Reuters article. When asked what he would do if he runs the Fed, Buffet said, "I probably wouldn't do much.Things are working pretty well, and I would be worried that if I raised rates significantly with negative interest rates in Europe, I would be very worried about what that would do to the flow of funds."
Will a Rate Hike Hurt The Housing Market?
According to PIMCO Blog, a Fed rate increase would not affect the real estate industry that much.
Here are the three reasons:
1. Fed Motivation: Drastic Changes Warrant Fed Increase
Fed will only increase rates if there's a drastic economic activity that needs that action, says the blog. With these improvement we see, it is possible that only smaller rate hikes may be imposed.
2. Mortgages are Fixed Rates
Monthly mortgage payments in the U.S. are mostly fixed and only the short-term rates will be greatly affected by a rate increase.
3. Limited Effect on Purchasing Power
The blog stated that even if the rates would be increased to 4 to 5 percent, it would not affect the homebuyer's purchasing power. The resulting amortization may increase by about $112 on a median home price, but it will still be affordable to most or they could just find another property that will suit their budget.
