Housing is likely to be more expensive. The interest on credit cards, cars and student loans is likely to go up. And interest on savings is not likely to grow all that much, at least not until later this year.
Those are the key takeaways California economists drew from the Federal Reserve’s strong hints Wednesday that it would soon begin raising interest rates for the first time in three years.
“I think there’s quite a bit of room to raise interest rates without threatening the labor market,” Chairman Jerome Powell said. While he gave no timetable, the first increase could come as early as March.
The good news is that the increases are expected to come gradually throughout 2022, so sudden jolts in monthly payments for loans are unlikely. The more sobering news is that the golden days of borrowing at rates unseen for generations is probably over, and any economic slowdown the policy triggers will hurt vulnerable communities more than others..
“Since everyone is now expecting rates to rise, the increase has largely already been baked into the cake. So no surprises,” said Mark Schniepp, director of the California Economic Forecast in Santa Barbara.
To people in areas where the economy has been shakier, such as much of the San Joaquin Valley, the impact of interest rate increases could reverberate quickly.
“There’s no doubt they’ll feel it. It’s going to affect people in several ways,” said Gokce Soydemir, Foster Farms endowed professor of business economics at California State University, Stanislaus, of the effect on the region of the interest rates and other new Fed policies aimed at slowing inflation.
Much of the Valley’s workforce is unskilled, and when the economy begins to slow, “they’re the first ones to be laid off, to feel a decrease in their purchasing power,” he said.
Higher mortgage interest rates
Here are some questions we posed and answered by Soydemir, Jordan Levine, chief economist for the California Association of Realtors; Sung Won Sohn, president of the Los Angeles-based SS Economics consulting firm and others:
Q. If I wait until later this year to lock in a mortgage rate, how much more will I be paying?
A. Based on the California projected median home price of $835,000, an increase in the average rate from 3 to 3.5% would cost a homeowner an additional $183, to $3,957, Levine said. If the rate were to go to 4%, the increase would be $373, for a monthly payment of $4,146.
Q. Will housing prices also go up?
A. Prices are determined by a host of factors, including supply and demand, location, inflation and whether people feel confident about their future.
The interest rate increase has been anticipated for some time, and last month, the California Association of Realtors predicted the median price of home resales would go up by 5.2% this year, well below last year’s 20.3% increase. The median 2022 price is forecast at $834,400, up from 2021’s $793,100.
Q. So is now a good time to buy a home?
A. There’s no easy answer. But remember this when shopping for homes in California, Sohn said.
“Historically, there has been an excellent correlation between the treasury rate and the mortgage rate. What matters most to the interest rate is expectations.”
So, he said, “What matters to the credit market is not what the Fed does today, but what it is expected to do in the coming months. We act on expectation.”
More interest on other loans
Q. What will happen to other loans, such as student debt?
A. Private loan interest rates are likely to go up. Experts advise paying down as much as you can before that happens. Same with credit card interest. Lower income people will feel the sting quickly, said Soydemir.
“People are going to default and that’s going to affect their credit rating,” he said, and when that happens, it becomes more difficult to buy anything that requires a loan.
Q. Will I get a bigger return on my savings?
A. Probably not much. While financial institutions will need to offer higher rates to attract savings, chances are the increases will be minimal at first.
Ken Tumin at Depositaccounts.com predicted it could take two Fed rate hikes before the rates on savings start inching up.
Q. So maybe by the end of the year we’ll see significant movement in rates. Why so slow?
A. One reason, Tumin said, is that deposit levels at banks remain high, thanks to government stimulus checks issued during the pandemic and lower leisure spending. In the San Joaquin Valley, for instance, bank deposits were up more than 21% in 2020.
“Most banks don’t need deposits, and thus, they are free to maintain rates at record low levels,” Tumin said. “Until loan levels rise and deposit levels fall to more normal ranges, banks may not be in a hurry to raise rates after the first few Fed rate hikes.”
If the Fed acts more aggressively with rate hikes this year to combat surging inflation, he said, that could mean faster rate increases on savings accounts in the second half of this year.
This story was originally published January 27, 2022 5:00 AM.