The Federal Reserve raised the Fed Funds Rate 25 basis points to a range of 2.00 – 2.25 in September, thus the prime rate rose by a quarter percentage point to 5.25%. This increases returns for money market accounts, CDs, and newly issued bonds, but more importantly it raises the cost of borrowing. Recent guidance from the Fed confirms that more rate hikes are to be expected as soon as December, continuing into 2019 and 2020. What does this mean for mortgages and construction-perm loans? Well, it means now is a better time to lock in a rate relative to the coming years. However, after factoring in rate increases next year, lending will still be cheaper than historic averages and pre-recession levels. Additionally, we may see some slowing of construction cost inflation as rising rates begin to cool the construction industry slightly.
Like in many hot housing markets, demand for material and labor in the Triangle has been very high for several years, undoubtedly driving cost increases. High-demand products and trade lead times slow the construction process, adding cost. A macro-level pull-back in velocity from increased capital expense would likely allow the industry, from both material and labor perspectives, to catch up to the hot market we’ve been experiencing. We are not financial experts, and can’t make any predictions about the cost to build in a year versus now (can anyone?), but it’s reasonable to assess that rising rates will tap the brakes on the housing market, freeing up supply and lowering prices; the extent of which is yet to be seen.