Posted On June 15, 2018
In a highly-anticipated move the Federal Open Market Committee (FOMC) voted to raise the benchmark interest rate on Wednesday to a range of 1.75-2.0%. Mortgage rates reacted by trending upward. Both new purchase and refinance mortgage applications took a downturn this week, after rising the previous week. Retail sales were especially strong, suggesting sustained Gross Domestic Product (GDP) growth into second quarter.
The Mortgage Bankers Association (MBA) weekly mortgage application survey declined for the week ending 6/8. New purchase applications and refinance applications each dropped 2.0% for a composite decrease of 1.5%. With rates moving higher, refinance activity is expected to continue to contract. Although overall mortgage activity has slowed, MBA economist Joel Kan noted, “government applications increased, driven largely by increases in FHA applications, reflecting stronger demand by first-time home buyers.” FHA loans are popular amongst first-time home buyers because of their low-down payment options. However, there are many conventional programs that also have flexible down payment requirements. First-time home buyers should consult a mortgage professional to review their full financial picture before deciding on a type of financing.
As expected, the FOMC voted to raise rates this week, the seventh rate hike since the Fed started gradually raising interest rates from near-zero levels in late 2015. The rock bottom unemployment rate and inflation nearing the Fed’s 2% target led to the decision to raise rates. Based on Fed Chair Jerome Powell’s statement, economists now expect two additional rate hikes this year instead of one more. The Fed believes inflation is likely to exceed the 2% target as the economy continues to strengthen.
Retail sales, or the total receipts of merchandise and related services sold to final consumers, jumped in May, up 0.8% month-over-month and 5.9% year-over-year. Market analysts suspect consumers are spending more because of economic strength and income increases buoyed by tax cuts. However, higher gas prices and rising inflation may also be triggering increased spending. Excluding autos, retail sales were up 0.9% month-over-month.
While Federal interest rate hikes do impact the cost to borrow money, particularly mortgages, car loans, and credit card bills; they are a sign of a strengthening economy. After the Financial Crisis, the FOMC lowered the federal funds rate to near-zero levels to enable consumers to borrow money and stimulate the economy. As the economy strengthens, more rate hikes are expected. Historically, average mortgage rates are still low, compared to the average rates ten-to-fifteen years ago.