With Interest Rates Poised to Raise, What Will Change?
As Los Angeles Times reports these changes are likely to bring a bevy of side effects both positive and negative. For starters it will now be more expensive to buy a home or car than it has been in years past. How else will the rising rates affect the economy?the
Home buying and refinancing
On November 7th, the day before the election, the average rate for a 30-fixed mortgage was 3.54%. According to the Times that average has swelled to 4.03% this week. Even ahead of the anticipated fed rate hike, this has led to a drop in mortgage applications. In fact USA Today reports that applications were down 9.4% for the week of November 25th even when adjusted for the Thanksgiving holiday (the unadjusted drop was 38%).
While the refinancing market is expected to take a dive, news for home buying overall is mixed. On the one hand a stronger economy means more eligible home buyers. However, with higher interest rates raising their costs and monthly payments, buyers may be priced out of larger homes or those in more desired areas. Calculations by the Times already peg the monthly payment difference between a pre-election mortgage of $450,000 versus one today at $125 — that’s certainly enough to give some prospective buyers pause.
During his campaign for the Republican nomination as well as in the general election against Secretary Hillary Clinton there were two points that Donald Trump hammered on: immigration and trade. While the former likely appealed to certain voters in the southwest the latter was celebrated by some in more northern states like Ohio and Michigan — the so called “Rust Belt” that proved so pivotal to Trump’s electoral win. Regardless of any tariffs or other penalties that President Trump might impose, a strong dollar could have trade consequences in and of itself.
Measured against foreign currencies, the dollar is currently at its highest point since 2002. Although on the surface that seems like a great thing (and it partially is), it is sure to cause headaches for exporters who sell their goods abroad. Ironically it also means that import goods will be cheaper, which is why candidate Trump had threatened in enact tariffs that will prevent U.S. businesses from moving their operations overseas.
The downside of low interest rates, which have incentivized buyers and borrowers since the financial crisis, is that investors have been seeing smaller returns. Assuming that rates do continue to rise, government bonds may once again become an attractive alternative to the volatility of stocks. However John Petrides of Point View Wealth Management Inc. warns against being too risk adverse, telling the Times, “Stocks provide growth. Bonds provide a ballast when equities are under pressure. Cash remains a short-term option but a long-term hostage to inflation. Don’t let upside or downside volatility derail your long-term investment goals.”
There is still more than 50 days until Donald Trump is inaugurated as the 45th President of the United States. Still the economic implications of his presidency are already being felt as rates begin to rise and the dollar strengthens. Perhaps Moody’s analyst Mark Zandi summed up the whole thing best when he told the L.A. Times, “The bottom line, when it’s all said and done, is the economy in theory shouldn’t be in a much different place.” Indeed the next four years, if nothing else, will certainly be interesting.