We have liftoff!
 
The Federal Open Market Committee finally took their first steps towards normalizing monetary policy.  There’s still a looooong way to go but, the first steps were taken last week.
 
We haven’t seen an increase in the Federal Funds rate since 2006, and there hasn’t been any shift at all, since the Fed moved their target rate between zero and .25% back in December of 2008, at the height of the market meltdown.
 
Additionally, they plan to continue reinvesting proceeds from their treasury and mortgage backed securities portfolios, meaning they’re still helping support those markets, and according to their policy statement “anticipate doing so until normalization of the federal funds rate is well under way.”
 
So, what does this mean to you?
 
In the near term, mortgage rates aren’t likely to shift much.  They’re slightly higher now than they were a week ago, but most of that actually occurred prior to the FOMC policy statement, possibly as an anticipatory move, or possibly for other reasons.  Either way, they’re still very much within the same range we’ve seen all year.
 
Mortgage rates are on the long end of the yield curve, and are more subject to supply and demand pressures than the short end of the curve, driven by the federal funds rate, where credit cards, car loans and student loans live.
 
It’s even possible that mortgage rates could actually dip.  
 
If people believe that equities markets have done so well over the last few years, more from monetary policy, than a strengthening economy, and they feel companies’ stocks will underperform as the “punch bowl” of easy monetary policy is taken away, they may move funds into treasuries and mortgage backed securities, driving prices up, and yields (interest rates) down.
 
Certainly, over time, nothing will change from what we know.  Rates cannot, and will not, stay as low as they’ve been forever.  They will rise.  But, just like the thirty-plus years that saw mortgage rates drop from double digits to low single digits, with various spikes and plateaus along the way, they’re probably going to move incrementally higher, in fits and starts, too.  
 
We’re probably looking at a very slow trajectory of increases both with the federal funds rate and mortgage rates.  And, as Federal Reserve Chair Janet Yellen said, by beginning to remove some of their extraordinary measures, they’re creating a little cushion, in case their projects are wrong, and they need to ease monetary policy again.
 
There are still, after all, potential headwinds that could slow or derail the progress the US economy is making.
 
In the meantime, if they’re able to stay on course with incremental increases in the federal funds rate next year, where you will see more of an impact will be on credit card, student loan, car loan, home equity lines of credit, and adjustable rate mortgages, too.  
 
Each of those are typically benchmarked by a specific short-term interest rate.  Credit cards, for example, are tied to the Prime rate.  The Prime rate generally mirrors the federal funds rate, but about 3% higher, so as of last week, Prime will shift to roughly 3.25% to 3.5%.  Most credit cards will have a margin over prime of somewhere between 6% and 12%, depending on your credit profile and the credit card you use.
 
Similarly, home equity lines of credit are tied to the Prime rate, with a margin that may be from -.5% to +4% or so.  Those too will see an increase with each upward move of the federal funds rate.
 
Adjustable rate mortgages are typically indexed to the 12-month LIBOR (London Interbank Offer Rate) or sometimes the US Treasury yield.  Although the prime rate and LIBOR are not directly linked, they’re both short term rates, so as one rises, typically so will the other.  In general, adjustable rate mortgages have a 2.25% or so margin over prime.  So, if you’ve got an ARM that is in its adjustment period, or approaching that point, you’re going to see incremental increases in your payments.  
 
One advantage of an Adjustable Rate Mortgage, however, is that they come with adjustment caps.  So, even if rates increase, you may be protected in the near-term from feeling the brunt of that.  Or, if you can afford to pay down the principal aggressively, you may be able to stay ahead of the rising yield curve.  Feel free to give me a call if you’re curious about your exposure to your adjustable rate mortgage increasing.
 
All that said, we’re still within about .5% of the lowest mortgage rates we’ve seen, ever.  But, we know it cannot, and will not last.  And, I think, for the first time, in a long time, we can officially say we’re accelerating the engines to lift off this historic floor (I know.  I said that in May/June 2013, but this time, I think I mean it).
 
Could there be events to derail that progress, and see rates dip again?  Sure.  Would I bet on that happening?  No.
 
So, as I like to say, better get ‘em while the gettin’s good.  Even if that “gettin’” could last for another several years, in relative terms.  After all, it wasn’t that long ago – heck, about ten years – that rates lower than 6% were seen as ridiculously low.  Now, anyone looking at the high 4%s is feeling put out.  It’s funny how things change.  I guess they’ll just keep changing, too.

There has been much talk of the housing recovery as many American homeowners are finally digging out of the hole created by the housing crisis. However, housing wealth is playing a much smaller role in the economy than it did before the downturn.
According to the Federal Reserve, home equity has roughly doubled to $12.1 trillion since house prices hit bottom in 2011. As a result, a key gauge of housing wealth—homeowners’ equity as a share of real-estate values—is nearing the point seen 10 years ago, before the downturn. This once would have given a significant boost to the economy, providing owners with more money and making them feel more flush and likely to spend. But today, this new wealth has little effect on homeowners’ behavior. The traditional ways Americans tap their home equity – home-equity loans, lines of credit and cash-out refinances – are still depressed, although higher than last year.
In the first half of the year, owners borrowed $43.5 billion against their homes with home-equity loans and lines of credit, according to Inside Mortgage Finance – 45% higher than in the first half of 2014, but hardly a quarter of the amount seen when equity was last as high in 2007.
Cash-out refinances, which let homeowners take out a new mortgage and tap some of the home’s value at the same time, were up 48% in the three months ended in August from the year-earlier period, according to Black Knight Financial Services. However, they remain below the level seen in the summer of 2013. The average cash-out refinance in the three months ended in August left the borrower with mortgage debt of about 68% of the home’s value—not a risky level by any means.
Home equity’s effect on consumer spending is at its lowest level since the early 1990s, according to Moody’s Analytics. The research firm estimates that every $1 rise in home equity in the fourth quarter of 2014 would translate to about two cents of extra consumer spending over the next one to one and a half years. That was a third of the impact home equity had before the downturn.
Why aren’t homeowners feeling that they have money to spend again? Firstly, since rising home prices over the past few years have made up for ground lost during the recession, many owners might not even realize they have equity to tap. The percentage of homeowners who thought they were underwater fell by merely one percentage point to 27%, according to Fannie Mae. Home equity is seen as more fleeting than it used to be. Plus, mortgage lenders aren’t giving owners access to as much equity as they used to. Finally, other kinds of loans are cheaper, removing one incentive to tap home equity.
“Consumers are definitely more conservative financially than they were 10 years ago. They’ve seen that house prices can be volatile,” Fannie Mae chief economist Doug Duncan said.
Home equity as a share of real-estate values at the end of the second quarter was 56%, according to the Federal Reserve, not quite back to the level of 60% seen in the boom. That means Americans’ mortgage debt is still high relative to home values, which could be another factor affecting the decision of whether or not to cash out equity.
Could this change anytime soon? Some economists think it’s possible – in many metro areas, home prices have overtaken or are about to overtake their boom-era peak. This is significant because it indicates new home equity is being created rather than merely making up for lost ground. It also means fewer homeowners are underwater, freeing them up for a home sale and potential purchase while also making home improvements and renovations seem less like throwing away good money.
“We’re at an inflection point. Since the crash, it’s all been about repairing homeowners’ equity but now that house prices are returning to prerecession levels, we will see homeowners’ equity driving consumer spending, home improvements and economic activity,” said Moody’s Analytics chief economist Mark Zandi.