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On Wednesday, June 14th, the Federal Reserve announced its decision to raise interest rates by a quarter of a point for the second time in 2017. Additionally, the Fed also outlined its plan to dramatically reduce its bond holdings to further strengthen the economy. However, with interest rates currently benchmarked between 1.0 and 1.25 percent, many are left wondering how the change will impact Los Angeles luxury real estate.
Fed’s Decision to Raise Interest & Shrinking Bond Holdings
The Fed’s decision to raise rates by a quarter of a point comes after its assessment of the economy since the last quarter point raise in March. Since then, the economy has responded positively to change. According to CBS News, unemployment has dropped to 4.3 percent and the GDP has expanded to 1.2 percent. Inflation, however, is still below the two percent level that The Fed deems necessary for a healthy economy. The Wall Street Journal, nonetheless, reports that officials “dismiss the inflation softness as transitory” and are still hopeful in the economy’s growth.
In addition to announcing an interest hike, the Fed also presented its plan to reduce its balance sheet by shrinking its bond holdings. As a response to the 2009 financial crisis, the Fed made an unprecedented move–it created a stimulus program that bought long-term bonds in the form of treasuries and mortgage-backed securities. This was intended to keep long-term rates low in an effort to encourage economic recovery. The stimulus program ultimately resulted in the program growing its asset holdings from $900 billion to $4.5 trillion.
To reduce its massive holdings, the Fed unfurled its plan to gradually invest less and less of its portfolio profit. “The Fed has said it will start by allowing $6 billion in Treasury securities and $4 billion in mortgage-backed securities to mature every month. Eventually its limit will climb to $30 billion in Treasury’s a month and $20 billion in mortgage securities,” says Forbes. By reducing its holdings, the economy is expected to stabilize on its own and maintain financial independence.
How Will Higher Interest Rates Affect Real Estate?
Higher interest rates are always welcome occurrences in real estate because of their impact on median home prices. Although higher interest rates may make obtaining a loan more difficult and expensive, they could be the key to slowing down the market and making homes more affordable. In an effort to entice buyers, sellers are likely to respond to a cooling market by knocking thousands, or even millions, off of asking prices.
Will Interest Rise Later This Year?
All signs point to yes. According to experts, the Fed has confirmed its plan to raise interest three times in 2017. The Wall Street Journal reports that the Fed expects to increase interest three times in 2018 to raise the benchmark between 2.0 to 2.5 percent. Three more quarter point raises are expected in 2017 where interest is predicted to reach between 2.75 and 3.0 percent.