Posted January 2, 2019

NAHB: What the Fed rate hike means for housing

With affordability at a 10-year-low, experts predict lower rate increases next year.

Housing affordability last quarter was at a 10-year low, and it appears that conditions at the start of 2019 aren’t likely to improve much.

The Federal Open Market Committee recently raised its target for the federal funds rate (the interest rate at which banks lend money to each other) by 25 basis points. This was the fourth rate hike of 2018. However, experts predict interest rates will rise at a less-aggressive pace next year.

NAHB Chief Economist Robert Dietz noted in a recent Eye On Housing post that the Fed’s “policy projections suggest two rate increases in 2019 and one additional rate increase in 2020.” Nevertheless, NAHB is forecasting no rate hikes in 2020, after what some, including Dietz, anticipate will be a noticeable slowdown in GDP growth in 2019.

Mortgage interest rates, however, will look to stay the course for the time being, after a decline in December. The ten-year Treasury rate, which is the key variable for mortgage interest rates, declined recently to below 2.77%. A lower 10-year rate typically means lower mortgage interest rates.

However, the Fed’s benchmark rate now stands at its highest level since the Great Recession and is up 100 basis points (one percentage point) in 2018 alone. As the Fed continues to gradually tighten monetary policy, this will put upward pressure on mortgage interest rates and further weaken housing affordability.