Today the Federal Reserve Board met and they decided to raise the interest rate by another 25 bps or .25%. This rate increase has been baked in for a while, since the last Fed meeting which actually was a month ago. For some reason, the market or the investors do not want to believe the Fed chair, Jay Powell and the market in general has been going up. At times, it feels as if the market participants have been challenging the Feds to increases the rates in hopes of Fed doing the opposite. So far, this effort has been futile and just like all the previous meetings, the Fed increased the rate again and confirmed their commitment to bring inflation under control.

The general rule of thumb is that assest prices move opposite to the interest rates which essentially means that as the cost of financing increases the asset price decreases. This, however is the investing principle and the reason behind is that the yield or rate of return decreases with the increase in the cost of financing. Now if we look at history, the last time rates were in 6.5% range was back in 2002. We have had various recessions and speed bumps in our financial markets since then. To keep things running smoothly, the Feds have had dropped the interest rates in order to stimulate the demand and economy.

Real estate is a special class, in the sense that it is finite and cannot be produced or created at will. This makes it inelastic and sensitive to demand pressures more than the interest rate. Besides that, real estate also is very local. One part of the country may be experiencing down swings and yet the other maybe booming in real estate. Even when we had the Great Financial Recession, many parts of New York did not experience any depressing or fire sales activity. 

The Fed admitted today that the job market is very strong. New York in particular has a very strong financial base and people on average make more money than in the other parts of US. If the job market holds strong, then New Yorkers will take this interest rate increase in stride. However, should the job dynamics change, we may be in for a surprise. The supply of existing home inventory is not increasing  or keeping up with the demand. This is helping stabalize the prices at the levels that we see. Other than that, we should be bracing for the rise in the mortgage rates in the near future.

Keeping these facts in view, the challenge that lies ahead is that what these recent rate increases mean for us?