Interest Rate Hike & The Boston Housing Market in 2016

The Federal Reserve’s recent interest rate hike from 0.25% to 0.5% on December 16 is expected to be the first in a series of hikes expected in 2016. Many people asking me, “What will happen to the Boston housing market, now?”

Believing a Fed rate hike will lead to a slowing housing market is a common concern, and there is a logic behind it. The logic is the Federal Funds Rate increase leads to a mortgage rate increase, thus housing prices are lower. Affordability for homes go down as monthly mortgage payments increase.

As with all things economic, it is not quite as simple as that. There are several reasons why the recent hike, and additional ones expected in 2016, will have minimal impact on the Boston Housing Market.

To understand why, we need to understand what a Federal Reserve interest rate hike really means.

The reason the Federal Reserve decides to increase the interest rates is to avoid inflation, caused by an overheated economy. Although many workers and earners in the United States don’t feel it yet, the economy has expanded and growth has picked up. If the Fed finds it necessary to increase the rate, it means they are seeing a robust economy. A robust economy means more income and more employment.

In Massachusetts, Boston especially, the economy has been outperforming the national one. The Beauru of Labor Statistics estimates Boston unemployment rate at a low 3.7% and the Commonwealth at 4.7%. More citizens are working and earning. So what does a rate hike mean at this point of the economic cycle? A growing economy, lower unemployment, which in turn, will lead to higher wages.

Although the Fed is expected to raise interest rates further in 2016, it may not be a very aggressive plan. Falling oil prices and a slow economy in Europe, and a weakening Chinese economy will mean tepid demand for U.S. exports, and a strengthening dollar. And, the Fed will have to think carefully before any rate increase which will damage our global trade partners’ economies further.

 

Another reason why Boston real estate will not be easily impacted by interest rate increases is due to the lack of inventory in the area. The demand for housing outstripped supply of homes in 2015. Although I expect more homes to come on market in 2016, the balance will be on the side of shortage, and thus pushing up prices regardless of cost of financing.

Between high rents, an increase in income, and tight housing inventory, home buyers will take on the added costs of a slightly higher mortgage in order to build their equity as homeowners. Here is an article from Forbes.com from last April explaining why higher interest rates are good for housing.

One last note, a reminder to put the interest rate hike in perspective! This week interest rates are quoted just around 4%. This is still a very low rate to start from when looking at a future rate increase.

Even with 12/16/15 rate increase and the predicted rate hikes of 2016, the Boston housing market will remain strong. It will remain robust in face of higher rates as high as 5%, and up to 6%.