Goldman Sachs strongly expects interest rates will rise soon

Lending

Federal Reserve Chair Jerome Powell explained to the House Committee on Financial Services that, while still important to the American Dream, the housing industry simply isn’t the economic driver that it once was, and actually doesn’t have much pull in monetary policy decision making.

So it may come as no surprise that the Federal Reserve isn’t taking into consideration the lending difficulties facing Americans today. In fact, despite a lack of supply and tight credit conditions (More than 1 million mortgages missed by some estimations), the Federal Reserve remains widely predicted to keep raising interest rates.

According to analysts at Goldman Sachs, there is still an 85% chance of higher rates, and more expensive mortgages for potential homebuyers, coming as soon as September.

“In his prepared remarks and testimony before Congress, Fed Chairman Powell reinforced his recent message that the labor market has improved, inflation has moved up, and there is a strong case for gradual rate hikes,” the economics team at Goldman wrote in an email to clients. 

Specifically on the general economics, the team adds their interpretation of Powell’s economic viewpoints:

“On the labor market, he concluded that “we are close to full employment but maybe not quite there.” On inflation, he noted that “moderate wage growth tells us that the job market is not causing higher inflation.” When asked about the risks to the 2% inflation objective, he said that he thought the risks are “roughly balanced,” but that he is “maybe slightly more worried about lower inflation still.” Like other Fed officials, he wants core inflation to be at roughly 2% for a while, not just touch it.

The good news is, Mark Fleming, chief economist for First American, believes the lending market will not be marginally impacted by higher rates. He thinks the homebuying market would survive, even if interest rates were to double.

Fleming asks: “Considering this historical context – is the housing market today as sensitive to mortgage rate increases as it was 40 years ago? How would a significant increase in the 30-year, fixed-rate mortgage rate impact the housing market today?” 

“Fortunately, the answer is not as dramatic as many may think. In fact, using our Potential Home Sales model, we doubled the mortgage rate from its current value of about 4.4% to approximately 9% and the market potential for home sales declined from the current value of 6.1 million SAAR to 5.8 million SAAR. So, if mortgage rates doubled overnight, our model indicates a decline of just 300,000 sales, a mere 5% decrease.”

 

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