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Interest Rates- What You Need to Know

Interest Rates- What You Need to Know

The Fed keeps talking about it and we keep holding our breath… is December the month the Federal Reserve with raise interest rates? And what does that mean for current and future real estate investments? Here is your need-to-know.

Catch me up

The Federal Reserve has kept interest rates at almost zero ever since the start of the Great Recession in 2008. This is in part to insure that the housing market did not completely collapse. Now that the economy has been holding strong its looking like the US might be ready to be taken off life support.

What are the signs the US can handle it?

First, unemployment is at a nine year low. Foreclosure rates hit a new low of o.17 percent this is down from 2008 when it was at nearly 2 percent and Fannie Mae predicts a 4.1 percent growth in disposable personal income. This would be the largest growth since 2008. The US economy is looking stronger and stronger.

Whats the hold up?

The global economy. The reasons why the Fed has not raised interest rates has less to do with the strength of US economy and more to do with is happening overseas.

Recently China have suffered some major set backs. China’s central bank has recently devalued its currency- the renmimbi 2 percent weaker against the US dollar. There was also a sharp drop in the Shanghai and Shenzhen stock market. A weaker Chinese economy could lead to problems in the US. Chinese goods have the possibility to become more competitive leading to possible job loss thus a rise in unemployment.

The European Union makes up about 87 percent of the total US economy. The concern is how the European debt crises and prolonged recession will effect American exports and the Stock Market if the Fed were to raise interest rates.

How does this effect the housing market?

If the Fed does raise interest rates there are a few things to remember. It does not necessarily correlate with a rise in mortgage rates. Mortgages rates, while effected by interest rates are independent. Higher interest rates does mean that some of the maturity date on loans will not be able to handle the debt service coverage but it is a small concern for most people. The Fed will be just testing the waters so don’t expect interest rates to get a major jump. Estimates are at between 50 and 100 bases point.

In Conclusion

The housing market, according to most experts, is for the time being safe. The US economy is stronger than it has been in years and so is the housing market.