Fed raises rates again, what does that mean?

So the new Fed Chairman Ben Bernanke did little earlier this week to veer from the path that former Chairman Alan Greenspan set for our country's fiscal policy. This continued tightening with yet another quarter point increase in the short term federal funds discount rate makes 15 straight increases since June 2004. Although the stock market could use a break from this current tightening cycle, I guess the slightly higher than expected revisions on last years core consumer price index numbers that came out today justified the Fed's actions. Not that inflation is a serious problem yet, but the Fed seems to be taking every precaution to check it before it really starts to rear its ugly head.

But what does that mean for you and me and in particular to real estate? It means that our short term, interest rate sensitive loans will be impacted. The HELOC or home equity line of credit products, based on this Fed controlled prime rate will be impacted the most as we will see yet another rise in rates and thus in our payments on our very next invoice. Longer term 30 year fixed or even ten year adjustable loans are still competitive, though creeping up. These loans are tied more closely to the 10 year treasury bond yields, as those products vie for the same investment dollar as mortgage loans or mortgage backed securities. Although the discount rate does affect bond prices and thus yields, the relationship is less direct than on loans based on the discount rate. So basically it's more of a wait and see.

The upshot is that because we are still in a general rising interest rate environment, you should keep one eye on the real estate market for something you really like and the other eye on the mortgage market for a good rate. When those two things come together, take advantage of the situation and look for a product that will provide you that rate for as long as you think you'll be in that home for. Because we have seen and will likely continue to see a slow down in the real estate market, not a bubble burst, but a slow down, it is more important than ever to identify the right property for your needs. Mistakes or regrets will not be bailed out by appreciation in the short term, like they might have been the past few years. Buy what you want and make sure you can hold on to it in case there is a short term correction. Taking the extra precautions now will help you weather any storm and will allow you to come out ahead in the future.