Vail Daily column: The Fed has spoken; what might happen next?
The other shoe finally dropped, ending years of speculation as to when the Fed would start to raise rates. On Wednesday the Fed raised the rate it lends money to banks by .25 percent and indicated that a string if similar increases might happen quarterly for the next year.
Initially the stock market surged Wednesday on the news that the goddess of the Federal Reserve Bank, Janet Yellen, had decreed that the economy was on the road to recovery. Perhaps investors were happy something finally was decided after many months and years of uncertainty. But on Thursday it seemed that Wall Street had come down from its giddiness and stocks retreated as somebody tallied up what higher rates might do to the cost of corporate debt and dampening consumer spending.
While there is somewhat less uncertainty out there, there is still plenty to it. There is no economic model in history to play the current situation off of. There are still many shaky areas of the economy that need to play out to put all the pieces together. Among those on the list are the low price of oil, which at about $40 a barrel is as unsustainable as over $100 a barrel. Right now oil industry workers are wondering about when they might get laid off and all the jobs that depend on the spending of the oil companies are hesitant about their future. The enormous growth of that segment of the economy played a key role in the current “recovery.”
Another chip soon to fall may be cheap adjustable rate mortgages. There are probably several hundred billion dollars of home mortgages out there that have been in the 2-3 percent range because they have adjustable rates and rates have been cheap for years. As the notices start rolling in that those rates have crept up the money has to come from someplace and consumer spending pretty much has to take a hit. It’s doubtful your boss is going to give you a raise just because your mortgage rate went up. My suggestion is if you have an ARM, look into refinancing it down into a fixed. Low to no closing cost refinances are still possible, and in some case the lender might pay you to refinance via a tax free credit that exceeds your closing costs.
Certainly the low mortgage rates have made buying a little more home than you might need very affordable the last several years, which has contributed greatly to the real estate recovery. While the difference between a 4.0 percent payment and a 4.375 percent payment is only $90 a month on $400,000 there is basically a generation of young homeowners and would be buyers who might hesitate, not recalling that 8-10 years ago rates in the seven and eight percent range were perfectly acceptable.
One of the impacts that seems to be touted on the news is that credit card rates will go up. That one seems a bit hard to swallow, because credit card companies for the most part gave up offering ultra low rates years ago. There are a few such deals out there, but not to the extent there once was.
But one good thing is that people who rely on interest income should start to see an improvement. And if the stock markets react positively overall that will bolster consumer confidence and hopefully increase tourism to our valley and investment in second homes.
I would expect we will see some breathtaking good days and bad days in the economy the next year or so until things sort themselves out, but overall I’m personally predicting the worst of it is over and that good times lie ahead for the economy and Eagle County.
Chris Neuswanger is a loan originator at Macro Financial Group in Avon and may be reached at 970-748-0342. He welcomes mortgage related inquiries from readers. His blog and a collection of his columns may be found at http://www.mtnmortgageguy.com.