The Fed and the Cost of Your New Home
WHY YOU SHOULD CARE
Because changing interest rates will impact how much you pay for that new car or home.
By Simon Constable
Simonomics: A regular look at the global economy from a former staff columnist at The Wall Street Journal.
For weeks we held our breath — at least those of us a little on the nerdy side did. And even if we weren’t quite so engrossed with the economy, we knew that the Federal Reserve’s decision on whether to raise interest rates was kind of important. After all, it hadn’t happened since Barry Bonds (remember him?) was still a big star.
Yep, economists, bankers and stockbrokers were in suspense over the Fed’s next step — and last week, we learned it was sitting pat. But if you’re about to click to another story, figuring this is a Wall Street type of thing, affecting only high finance, let us inform you that the news hits you right in the comfort of your own living room — namely, by impacting how much it’ll cost you to borrow money.
Let’s look at the two biggest expenses for most people in the U.S.: their home and their car. If you are angling for a fixed-rate mortgage to get yourself a new house, then the borrowing cost in a year or so will likely be lower than it is now or, at worst, the same, according to David Ranson, director of research at consulting firm HCWE Worldwide Economics. Today, the national rate for a conventional 30-year loan is around 4 percent, which is considered low by historical standards. Still, even lower is possible, and better for buyers.
That’s because there are signs the economy will slow down, and investors are becoming increasingly cautious, Ranson warns. One indicator he scrutinizes is the extra amount that investors demand (over what they could get from buying government bonds) to risk their capital. Over the past year or so, that additional amount — which is known as the spread — between somewhat risky bonds and those considered risk-free has more than doubled. Typically, when the spread widens this much, Ranson says, growth slows about a year later. And when growth starts slowing, investors snap up safe-haven investments such as 10-year U.S. Treasurys.
For those seeking a car loan, the news is similarly good — just not as good as for those pushing for a home loan.
While that might sound dismal — and, after all, economics is the dismal science — the trend of investors piling into Treasurys is actually great news for new homebuyers, since it usually leads to lower mortgage rates. Guy Benstead, partner at Greenwich, Connecticut-based adviser Cedar Ridge, says that going forward, he sees rates “not too far from where we are now.”
Buying a car instead? The news on car loans is similarly good — just not as good as for those pushing for a home loan. Eventually, the Fed will raise its key interest rate, and when it does, the cost of borrowing to buy an automobile will increase. (Don’t worry if you already have a fixed-rate auto loan — it won’t be affected, although new loans will.) But variable-rate loans for autos do tend to be closely tied to the rates that the Fed sets. So, yes, you’ll pay more. But the Fed will increase rates “less than most people expect,” says Dan Veru, chief investment officer at Fort Lee, New Jersey-based Palisade Capital Management. There is precedent for such caution, Veru says, pointing to the mini-depression in 1937, which may have been caused by the Fed acting too soon.
If the Fed continues to move slowly, it will have little impact on monthly car payments. And, for most people, Veru says, that’s how they think about a car — like a monthly utility bill. So it looks like that new sports car might still be in the cards. Aren’t you glad now that the Fed didn’t act, even if you weren’t paying close attention?