Maurie McGuire
There’s been a lot of debate about the Federal Reserve raising interest rates in December. The Fed is on record saying they will with Fed Chair Janet Yellen repeating that sentiment again on December 2 said she’s “looking forward” to the first interest rate hike in nearly 10 years. She didn’t say she would favor a hike at the December 15-16 policy meeting but did say that data since their October gathering has been “consistent” with an improving labor market, which should lead to the Fed target of 2% inflation. Waiting too long to tighten could force the Fed to hike “abruptly”.
The Fed has said this many times before during the 10 year tenure of zero interest rate policy, also known as “ZIRP”. But they haven’t raised the rate for varied reasons. One indicator that would justify a rate increase is the closely watched employment index, currently at a decade low of 5%, as of yesterday’s Non-Farm Labor Report. The Fed at one time considered full employment when the unemployed rate was at 6%. That target moved to 5% because of the conflicting employment participation rate which is at a 38 year low. This caused the Fed to adjust their complex equation. The question they are asking is whether there are enough tax payers gainfully employed? The answer is maybe.
We attended the UCSB Mid-year Economic Forecast Project on November 19th where Executive Director Peter Rupert said he didn’t know if the Fed would actually raise rates this time sighting the disbelief in the numbers produced by the US Bureau of Labor Statistics. So here we are trying to make economic decisions with data that may not be accurate.
What we do know is a strong economy is measured by the number of people gainfully employed. They create wealth, spend money and buy houses. We are seeing evidence of this across all price ranges, and in the entry level market where there is the most activity, which in Santa Barbara is the $500,000 to $800,000 range. These are generally younger buyers making their first purchase. They have good paying jobs in health care, technology and professional services. See the October Market Trends data here (November Trends will be on our blog as soon as available).
As we’ve earlier reported, the second-home market is also strong. We are seeing buyers purchasing homes for their pending retirement and either choosing to rent out their newly acquired house or begin planning a remodel project. For these reasons we don’t see the projected modest rate increase as detrimental to the Santa Barbara real estate market. Buyer’s will still be paying historically low rates for a mortgage. Where there’s been a market slowdown in largely because there are very few homes available for sale.
Whether you are planning to purchase or sell, please feel free to contact us for a confidential review of the current market and how it affects your real estate goals.