Thursday, December 15, 2005

Feds hike rates

The National Association of Realtors just announced that 2005 will be the fifth year in a row for record housing sales and that 2006 will be another good year. Yet, other news suggests that housing could be pulled down by rising interest rates and renewed fears that inflation might not quite be under control.
The Federal Reserve raised short-term interest rates for the 13th time suggesting that chief Alan Greenspan plans on turning over the reins of Federal monetary policy to his successor Ben Bernanke with inflation as much under control as possible.
"Core inflation has stayed relatively low in recent months and longer-term inflation expectations remain contained," stated the Fed. "Some further measured policy firming is likely to be needed to keep the risks to the attainment of both sustainable economic growth and price stability roughly in balance." It added that "the Committee will respond to changes in economic prospects as needed to foster these objectives."
After 18 months of rate hikes, which impact short term rates such as credit cards or home equity lines of credit immediately and long-term interest rates eventually, the housing market is still in excellent shape, and might even afford new opportunities to homebuyers. The reason? Long-term interest rates don't move in tandem with short-term rates. Long-term rates are tied to treasury bonds, which could lower yields in an inflation-controlled environment. Mortgage interest rates would follow.
Experts, such as David Lereah, chief economist for the NAR, expect the 30-year fixed-rate mortgage to trend up modestly but stay well within historic norms of 6.5 percent through the second half of 2006.
The NAR expects the gross domestic product to grow 3.7 percent for 2005 and 4.1 percent for 2006, with a rise in employment. Housing prices will continue to rise but not at the double digit clip of the last few years. While the average California home price rose over 20 percent to $535,000 in 2005, they are anticipated to rise another 6 percent this next year. Will they, if interest rates increase and fewer buyers are able to afford the average priced home?


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11:18 PM  

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