Watching interest rates

The housing market showed signs of continued strength last month. Sales of existing homes increased 6.5% in July as compared to June. Also sales of existing homes were more than 17% higher than a year ago.

The National Association of Realtors is also reporting that this increase was the best month of sales since November of 2009 when the home-buyer tax credit was in effect. Home prices also increased for the 17 straight month.

Economic analysts are crediting the real estate market for bolstering the economy, improving consumer confidence, spurring household spending and creating jobs.

Homebuyers fearing higher prices and mortgage rates are entering into contracts to purchase a property. Many of these contracts were signed in May and June as interest rates started to tick up.

Other factors impacting home sales are a shortage of skilled-labor and buildable land parcels. In July, builders started construction at the slowest rate in the past eight months. Despite these challenges, the median home price in July went up over 13% from last year.

The number of homes listed for sale increased 5.6% in July when compared to June, but was five percent below last year’s level. Home prices are expected to increase, but more slowly.

Currently, it would take 5.1 months to sell the existing inventory of homes available for sale. This is down from 6.3 months last year at this time.

Housing analysts and anyone looking to buy or sell are focused policies of consideration by the Federal Reserve. The Fed wants to ensure it can control short-term rates when monetary policy shifts. The Fed has been formulating exit strategies from its easy-money policies.  Over time the Fed wants to lift interest rates from near zero.

The Fed has maintained a zero to 0.25 % for the federal-funds rate. This target coupled with the Fed’s bond-buying programs have kept interest rates very low facilitating market liquidity since the economic downturn. It has been reported that the U.S. government has added $5.7 trillion of debt in the form of Treasury securities.

But a problem that has arisen is that there a difference in interest rates with what the commercial banks get for their deposits with the Fed and the effective federal-funds rate.

The main reason for the difference is that the Fed doesn’t pay Fannie Mae and Freddie Mac for their deposits. Thus, the government mortgage companies are inclined to take slightly more from commercial banks to realize a return on their money.

The amount of reserves in the U.S. banking system enables the effective federal-funds rate to remain low even if the Fed begins to pay banks more for overnight deposits. The Fed is considering reverse repurchase programs.

A concern when the Fed increases the interest rates on reserves is that, the funds rate may not similarly rise. Such programs by the Fed are expected to attract more diverse market participants to purchase securities from the central bank and thereby more effectively absorb easy money from the financial system and keep interest rates in line with the Fed’s target.

The Fed has stated that short-term interest rates will remain low until the national unemployment rate falls below 6.5% which is projected in two years.

Nonetheless, homebuyers will still be getting home loans at historical lows even as interest rates tick up.

 

Mary Ann Clark is a Realtor with Coldwell Banker at 177 West Putnam Avenue in Greenwich. Questions or comments may be emailed to [email protected]

By participating in the comments section of this site you are agreeing to our Privacy Policy and User Agreement

© Hersam Acorn. All rights reserved. The Greenwich Post, 10 Corbin Drive, Floor 3, Darien, CT 06820

Designed by WPSHOWER

Powered by WordPress