The Federal Open Market Committee (FOMC), the monetary policy arm of the Federal Reserve System, concluded its two-day meeting and released a statement announcing no change in the target range for the federal funds rate. The current 50-75 basis point range was expected to be maintained following this first meeting since the December meeting, at which the target range for the funds rate was raised for only the second time since the financial crisis.
The pace of rate increases is expected to accelerate. Among FOMC participants, the median projection of the “appropriate” level for the funds rate indicates three rate increases by the end of 2017. The CME Group’s FedWatch Tool (CME) indicates the FOMC meeting in June is currently the most popular bet for the next increase.
With payroll gains steady, the unemployment rate below 5% and inflation grudgingly moving toward the Fed’s 2% target, economic conditions are right for a faster pace for monetary policy normalization, but the mantras of “only gradual increases” and “below levels expected to prevail in the longer run” still apply.
Absent any unforeseen adverse shock to domestic or global economic/financial conditions, the path is clear for a more steady stream of rate increases. And Fed policymakers would benefit from more maneuvering room in the event of some shock. A higher funds rate provides more room to cut rates if the economy needs stimulus.
So, for now, no change in the funds rate, and no news is good news. But don’t get used to it, the economy is in good shape, policy normalization will accelerate, and the times they are a changin’.
Many builders are unware that buyers do not buy based on price, they buy based on down payment and monthly payment. While they usually use price as a screening tool in deciding what to look at, they buy based on their up-front and monthly recurring cost. Now would be a very good time for builders to buy forward mortgage commitments to keep interest rates within reason and protecting their sales backlog. Using a rate cap commitment (buyer will pay market rate but the maximum rate is capped) is the best and most affordable. Builders should also consider temporary mortgage buydowns to show potential buyers the lowest possible initial monthly payment. If the builder is able to offer a low up-front and monthly cost, it is good practice to put this information in a prominent position in your print ads. if the builder controls a mortgage entity, great care should be given to providing the required disclosures. Talk to your mortgage lender(s) about this and, if they don’t know what you are talking about, get yourself another lender.