How will the Latest Federal Interest Rate Hike Affect You?
June 15, 2017
SVN Imbrie Realty Staff
On Wednesday, June 14, 2017 the Federal Reserve surprised the public by increasing the interest rate by 25 basis points to a range of 1% to 1.25%. This marks the 4th time since 2015 that the Fed has increased the interest rate, with the last time being back in March of 2017. While the rate hike will definitely have a long-term impact on the economy, the big question is how will this rate increase affect your bottom line?
For short term borrowers, the rate hike will hit your wallet almost immediately. Simply put, the fed funds rate determines the interest rate at which banks borrow short-term money. Increases are always passed on to borrowers, mostly through higher rates on things like credit-card debt. This debt is based on the banks' prime loan rate, the interest rate used as a starting point for short-term loans such as credit cards.
As far as how the increase will affect real estate market and lending, higher interest rates make borrowing more expensive for owners. This will have a constraining effect on the commercial real estate market. All else being equal, cap rates will go up and property prices will come down. Yet higher rates also typically signal a stronger economy, which tends to be associated with a stronger real estate market.
According to Frank Nothaft, chief economist at CoreLogic, “Fixed-rate mortgage rates are likely to gradually edge higher over the next six to 12 months. Rates are likely to rise to 4.25% to 4.50% by the end of 2017. With fixed-rate loan rates up by 0.5 [percentage point] since last summer, and house prices in national indexes up at least 5%, the monthly principal and interest payment is more than 10% higher than it was last summer…”
Also every time rates sneak up fear kicks in and many will proclaim it is the death of refinancing. However, that’s rarely the case. While the share of mortgage refinance lending has dropped significantly over the course of the past year. (In 2016, refis accounted for 48% of all loans, and that’s expected to drop to between 21% and 31% by the end of 2017, according to the Urban Institute.) While property owners still have some time to refinance their loans, it is advised to refinance sooner rather than later.
If you have any questions regarding your position on your commercial real estate investment, please contact one of our advisors. SVN Imbrie Realty has assembled a team of experienced commercial real estate experts across all property types. They will be able to discuss with you your options and come up with a strategic plan for your investments.