Although there have been some blips, bonds have grown substantially in value since the 1980s. They’ve performed extremely well for a number of reasons, not least of which is the big slowdown in inflation over that time period.

The result, for investors, has been that anything “bond-lik,e” i.e. capable of paying a regular income – like a high-dividend stock or even a property like your home – has shot up in value. A reversal of bond prices would mean less support for such investments.

That’s what the economy is currently experiencing. According to Financial Times, American worker wage growth is hastening the sell-off of bonds by the US government, which is decreasing the overall price of bonds. As bond prices go down, the interest rates that they offer new investors go up. That rate jumped to 2.85 percent last Friday, the highest level since 2014.

Since the rates at which banks lend their money are largely based on the interest rates offered by bonds, regular folks looking to take out a mortgage or a loan are facing higher costs.

How does this work?

If we’re talkin’ bond prices, we’re talkin’ yield. When the price of a bond goes up, the yield of that bond goes down! Let’s say you’re getting paid $5 each year. If you pay $50 for that right, then you’re making a 10% “yield” (5/50 = 10%). But if you pay $100 for that right, then you’re making a 5% “yield” (5/100 = 5%).

It’s the same thing with the price of a bond because the amount a bond investor gets paid (usually) is fixed. And so, when the bond goes up in value, the “yield” goes down – and vice versa.

For realtors, its important to help clients shop for the best rates to improve their confidence in this market. Leveraging the right online and local financing resources can help potential buyers get the best deal. Explaining broader market context is also critical. Historically, a three percent interest rate is still very low.

According to Investopedia, mortgage rates averaged 7.81% in 1996 and 10.19% in 1986. Instilling confidence with information will put buyers and sellers in the right place to make moves.

In a year of political uncertainty, the release of any jobs report is polarizing. Political figures and armchair policy wonks will read into the data as they wish, but not housing economists.

That’s who we look to in these times, because we all know that jobs is the cure-all for a recovering economy, but payroll growth slumped in September as the U.S. Labor Department reports that employers added only 156,000 jobs.

This fell short of the 172,000 originally projected by economists surveyed by Bloomberg.

Hidden positives in the report

Dr. Ralph McLaughlin, Chief Economist at Trulia said, “While the September jobs report came in below expectations, the continued addition of jobs to the US economy will help buoy demand for homes, both on the for-sale and rental side of the market.”

He observed another positive hidden in the Labor Department result. “In addition, wage growth kicked up again, which will help bolster the savings of first-time homebuyers trying to scrape together a downpayment.”

Real estate remains unchanged

“Given no major surprise in the data, the national outlook for real estate market remains essentially unchanged, with home sales expected to squeak out slight gains in 2016 and 2017 while commercial building vacancy rates should continue to fall,” said NAR Chief Economist, Dr. Lawrence Yun.

Yun adds that “we should note that men have been underperforming as 68.4% of adults have jobs, down from historic norm of around 75%. Meanwhile, 55.8% of women have jobs, roughly matching the historic norms.”

Pointing out that the data is being “digested” through the perspective of the upcoming election, Dr. Yun notes that, “among men, those with a college degree 72% of adults are working while only 54% of those with only a high school degree are working.”

Dr. Yun observes, “There will surely be a big divergent voting patterns among men versus women and among those with college education and those without in November.”

#jobsVhousing

As a little going away present for 2015, the Federal Reserve raised rates in December. Although they hadn’t been touched for many, many years, it was no surprise to economists. Now the question is, will the Fed raise rates in 2016, and if so, by how much?

Most market analysts are forming a consensus, expecting three to four hikes in 2016. Let’s discuss.

Slowly but surely the hikes will roll in

According to Tim Duy’s Fedwatch, the Federal Reserve “will to [slowly] hike rate. Economic conditions will be sufficient for the Federal Reserve to justify 100bp of rate hikes in 2016, although the Fed will not want to appear mechanical in its normalization process. Thus, they will likely find themselves hiking every other meeting beginning in March 2016.”

Duy goes on to say that the Federal Reserve will be slow to begin the process of normalizing the balance sheet. Although they will be fully engaged in that process by the middle of the year. That conversation will take on more urgency if they have difficulty controlling short rates with their new tools.

The minutes of the December FOMC meeting were released in the first week of January.

Fred Duy maps out that “regarding the medium-term outlook, inflation was projected to increase gradually as energy prices and prices of non-energy imports stabilized and the labor market strengthened.” Furthermore, comments Duy, “taking into account economic developments and the outlook for economic activity and the labor market, the Committee is now reasonably confident in its expectation that inflation would rise, over the medium term, to its 2 percent objective.”

A small move, but a hike nonetheless

According to the Federal Times the hike represents a very small move. “It will be reflected in some changes in borrowing rates. Longer term interest rates, loans that are linked to longer term interest rates, are unlikely to move very much. The impact of a single quarter-point interest rate hike is virtually inconsequential.” That said,  this [hike] could be the start of a series of interest rate hikes, and the cumulative effect of those could be significant over the course of the next couple of years.

What of mortgages?

Of particular interest is mortgages. The FT points out that “the rules for mortgages are roughly the same as those for student loans: if you have a fixed rate mortgage, you needn’t worry. If you have yet to take out a mortgage but plan to do so in the future, you will receive a slightly higher rate than you would have if you had locked in your rate.”

Conversely, if you or your clients have (or are considering) an adjustable-rate mortgage, expect the rate to go up.

The Fed will remain cautious

Calculated Risk’s Bill McBride notes, “If inflation picks up, then four rate hikes is probably “in the ballpark”. If inflation stays low, then we will see fewer rate hikes.”

That’s about what our team is hearing from various sources. McBride adds, “I’ve seen several people arguing the Fed will be cutting rates by the end of 2016 – I think that is unlikely. Instead I think the Fed will be cautious – and they will not want to reverse course. Right now I think something around three rate hikes in 2016 is likely.”

It’s not just black and white

The decision to raise rates probably seems easy on paper. But actually implementing those rate is a bit more complicated. As always, taxpayers are the ones that feel the brunt of change.

#InterestRates