7 ms·

Hi HN, can someone please explain what are the implications here for the average-Joe?

by javiayala 11y ago

jdubs 11y ago
Money becomes more expensive to borrow.
- pen2l 11y ago
  Harder to buy a house, rents might go up, etc. Also, harder to raise capital for startups. Though that's probably a good thing that the bar is raised -- will be better in the long term for everyone.
  - arbitrage 11y ago
    No, likely easier. Think of it this way. Borrowing money costs you more, but makes the lender more money in interest. Lenders now have more of an incentive to loan out money, because they'll actually be earning more (eventually) on it.
    - monknomo 11y ago
      But if pen2l was a marginal borrower before the rate hike, this might have disqualified him (without a bigger down payment anyhow)
  - czinck 11y ago
    Not really, any long term fixed rate loan had this priced in for months. In fact, the FNMA 30 year interest estimate is slightly lower now than when it opened, opened at 3.040% and is currently at 3.019% (sorry, no internet source available for that or I'd link it). The question this morning was if they were going to raise the rates today or next quarter and by how much, not if they were going to. Edit: It's now moved up to 3.048%, but either way, my point is that whether you closed on a long term fixed rate loan yesterday or today doesn't really matter.
    - danieltillett 11y ago
      The fact that we can borrow at 3% for 30 years and we don't use this to invest in productive infrastructure assets is insane.
      - encoderer 11y ago
        Who is we? The federal govt can borrow at far lower rates than 3%.
        Renevith 11y ago
        Not for 30 years. In fact, as of yesterday 12/15, the 30-year treasury rate was exactly 3.00%. https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield https://www.treasury.gov/resource-center/data-chart-center/i...
        encoderer 11y ago
        Great link, thank you!
        danieltillett 11y ago
        We the people. I was being a bit generous with the we bit since I am Australian, but the same thing applies to our government too. My state just sold off a hugely productive piece of infrastructure (electricity poles and wires) to pay down debt. The crazy thing is the infrastructure returned twice as much per year in dividends than the interest on the debt retired.
  - fludlight 11y ago
    > Harder for me to buy a house. Bummer. Yes and no. Yes because the monthly payment on a new mortgage for a given purchase price just went up. No because that payment went up for everyone by the same amount at the same time, so purchase prices will (theoretically) adjust downward. Keep in mind that today's news means a bak will lend you money at 4% instead of 3.75%, so the effect is minimal. Other factors that influence the housing market such as strength of the local economy and availability & quality of financing won't be affected unless we see substantial rise in rates.
    - bmm6o 11y ago
      > No because that payment went up for everyone by the same amount at the same time The rate is more significant the more you borrow, and not everyone has to borrow the same amount to buy the same hypothetical home. Buyers who have to borrow more are less attractive to sellers, ceteris paribus, since there's a greater chance of the deal falling through. But if we're talking about a .25% difference, it won't have a real measurable effect.
      - deleted 11y ago
        [deleted]
- pc86 11y ago
  It is now marginally more expensive than "free."
cwal37 11y ago
My personal economist-on-twitter of choice to tune into around fed and other news is Justin Wolfers[1]. Your mileage may vary, but he's certainly willing to express an opinion in what I consider a pretty clear manner (not to say he isn't opinionated, I just find his prognostications and commentary generally compelling). [1] https://twitter.com/JustinWolfers https://twitter.com/JustinWolfers
damoncali 11y ago
An oversimplification: Interest rates are going up over the long run in an effort to keep inflation from getting out of hand (very generally, asset prices go down when interest rates go up). The risk is that it will worsen unemployment before we're ready for it.
mikeryan 11y ago
The Average Joe's home loan just got a slight bit more expensive.
- nemo44x 11y ago
  However, the cost of the home in many markets will have decreased slightly as a result.
- quadrangle 11y ago
  Woohoo, that means that less people will be able to afford the highest prices, which means the bubbling up sales prices will go down, and those of us who have been saving up for a home will have a better shot instead of getting priced out by folks willing to take on extreme loans because of low interest rates.
afiedler 11y ago
Realistically, not much for a while. The FED still doesn't think inflation will hit its target until 2018, so low rates are here for the time being. The two things you might notice: - Slight increase in rates on CDs, money market accounts, and other short-term savings - Slight increase on car loan rates, mortgages, and other long-term consumer borrowing
jfoutz 11y ago
The fed interest rate is the foundation for pretty much all loans, cars, mortgages, whatever. Low interest rates are good for borrowers. I want a car, or a house, or a power plant, or a jet, or whatever. I want to spend some money that i don't actually have. This changes the economy because more money is moving around. High interest rates are good for lenders. I've got this pile of cash that isn't doing anything. The higher the rate, the more likely i am to loan it to someone who wants to do something with it. The higher the rate, the more sure the borrower needs to be that they can actually put that money to good use. Not only do i have to get you your money back, i have to get you all the interest as well. Lower rates mean more activity, more people borrowing and buying stuff. Higher rates slow things down, but bring more investors out. Say the fed rate went up 5%. Yesterday i could give you a home loan for 5%, today i could give you a loan and make 10% instead. Since that rate is the foundation of everything, my risk stays the same, but it's much tougher for you, because you have to come up with a bunch more money. They made a tiny, probably imperceptible change to you and I, unless you're actively looking to take out a loan. Anyway, that's the gist. Borowers need to be a tiny bit more sure they can pay the interest.
- sharkweek 11y ago
  Here's one thing I don't get, pardon my fundamental lack of understanding of macroeconomics here. How is there so much liquidity when fed rates are zero?
  - babuskov 11y ago
    All the people/organizations that have extra money are incentivized to spend it instead of keeping it in banks as savings.
  - erichurkman 11y ago
    For lenders, low rates make it easy to borrow money to in turn lend to consumers. As the rate increases, lenders will pass the higher rate along to consumers, which in turn leads to lower borrowing by consumers due to higher rates.
  - phdp 11y ago
chiph 11y ago
If they have a variable-rate credit card that has a balance on it, they might want to start paying it down to reduce their interest costs (a good idea in any case). If they have an ARM for their house they might want to look at what the lifetime interest rate cap is on the loan. Add that to the margin rate to find out what the payment could potentially go to. If they're not comfortable with those numbers, they might want to refinance now into a fixed-rate loan, or see how long they plan to be in the house. There will be hidden changes as well, as businesses will be paying more for operating loans, and this increase will be passed onto their customers. So food, entertainment, etc. costs will all go up. In short, pretty much everything you could buy just got a little more expensive.

Hi HN, can someone please explain what are the implications here for the average-Joe?

jdubs 11y ago

Money becomes more expensive to borrow.

pen2l 11y ago
Harder to buy a house, rents might go up, etc. Also, harder to raise capital for startups. Though that's probably a good thing that the bar is raised -- will be better in the long term for everyone.
- arbitrage 11y ago
  No, likely easier. Think of it this way. Borrowing money costs you more, but makes the lender more money in interest. Lenders now have more of an incentive to loan out money, because they'll actually be earning more (eventually) on it.
  - monknomo 11y ago
    But if pen2l was a marginal borrower before the rate hike, this might have disqualified him (without a bigger down payment anyhow)
- czinck 11y ago
  Not really, any long term fixed rate loan had this priced in for months. In fact, the FNMA 30 year interest estimate is slightly lower now than when it opened, opened at 3.040% and is currently at 3.019% (sorry, no internet source available for that or I'd link it). The question this morning was if they were going to raise the rates today or next quarter and by how much, not if they were going to. Edit: It's now moved up to 3.048%, but either way, my point is that whether you closed on a long term fixed rate loan yesterday or today doesn't really matter.
  - danieltillett 11y ago
    The fact that we can borrow at 3% for 30 years and we don't use this to invest in productive infrastructure assets is insane.
    - encoderer 11y ago
      Who is we? The federal govt can borrow at far lower rates than 3%.
      - Renevith 11y ago
        Not for 30 years. In fact, as of yesterday 12/15, the 30-year treasury rate was exactly 3.00%. https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield https://www.treasury.gov/resource-center/data-chart-center/i...
        encoderer 11y ago
        Great link, thank you!
      - danieltillett 11y ago
        We the people. I was being a bit generous with the we bit since I am Australian, but the same thing applies to our government too. My state just sold off a hugely productive piece of infrastructure (electricity poles and wires) to pay down debt. The crazy thing is the infrastructure returned twice as much per year in dividends than the interest on the debt retired.
- fludlight 11y ago
  > Harder for me to buy a house. Bummer. Yes and no. Yes because the monthly payment on a new mortgage for a given purchase price just went up. No because that payment went up for everyone by the same amount at the same time, so purchase prices will (theoretically) adjust downward. Keep in mind that today's news means a bak will lend you money at 4% instead of 3.75%, so the effect is minimal. Other factors that influence the housing market such as strength of the local economy and availability & quality of financing won't be affected unless we see substantial rise in rates.
  - bmm6o 11y ago
    > No because that payment went up for everyone by the same amount at the same time The rate is more significant the more you borrow, and not everyone has to borrow the same amount to buy the same hypothetical home. Buyers who have to borrow more are less attractive to sellers, ceteris paribus, since there's a greater chance of the deal falling through. But if we're talking about a .25% difference, it won't have a real measurable effect.
    - deleted 11y ago
      [deleted]
pc86 11y ago
It is now marginally more expensive than "free."

cwal37 11y ago

My personal economist-on-twitter of choice to tune into around fed and other news is Justin Wolfers[1]. Your mileage may vary, but he's certainly willing to express an opinion in what I consider a pretty clear manner (not to say he isn't opinionated, I just find his prognostications and commentary generally compelling). [1] https://twitter.com/JustinWolfers https://twitter.com/JustinWolfers

damoncali 11y ago

An oversimplification: Interest rates are going up over the long run in an effort to keep inflation from getting out of hand (very generally, asset prices go down when interest rates go up). The risk is that it will worsen unemployment before we're ready for it.

mikeryan 11y ago

The Average Joe's home loan just got a slight bit more expensive.

nemo44x 11y ago
However, the cost of the home in many markets will have decreased slightly as a result.
quadrangle 11y ago
Woohoo, that means that less people will be able to afford the highest prices, which means the bubbling up sales prices will go down, and those of us who have been saving up for a home will have a better shot instead of getting priced out by folks willing to take on extreme loans because of low interest rates.

afiedler 11y ago

Realistically, not much for a while. The FED still doesn't think inflation will hit its target until 2018, so low rates are here for the time being. The two things you might notice: - Slight increase in rates on CDs, money market accounts, and other short-term savings - Slight increase on car loan rates, mortgages, and other long-term consumer borrowing

jfoutz 11y ago

The fed interest rate is the foundation for pretty much all loans, cars, mortgages, whatever. Low interest rates are good for borrowers. I want a car, or a house, or a power plant, or a jet, or whatever. I want to spend some money that i don't actually have. This changes the economy because more money is moving around. High interest rates are good for lenders. I've got this pile of cash that isn't doing anything. The higher the rate, the more likely i am to loan it to someone who wants to do something with it. The higher the rate, the more sure the borrower needs to be that they can actually put that money to good use. Not only do i have to get you your money back, i have to get you all the interest as well. Lower rates mean more activity, more people borrowing and buying stuff. Higher rates slow things down, but bring more investors out. Say the fed rate went up 5%. Yesterday i could give you a home loan for 5%, today i could give you a loan and make 10% instead. Since that rate is the foundation of everything, my risk stays the same, but it's much tougher for you, because you have to come up with a bunch more money. They made a tiny, probably imperceptible change to you and I, unless you're actively looking to take out a loan. Anyway, that's the gist. Borowers need to be a tiny bit more sure they can pay the interest.

sharkweek 11y ago
Here's one thing I don't get, pardon my fundamental lack of understanding of macroeconomics here. How is there so much liquidity when fed rates are zero?
- babuskov 11y ago
  All the people/organizations that have extra money are incentivized to spend it instead of keeping it in banks as savings.
- erichurkman 11y ago
  For lenders, low rates make it easy to borrow money to in turn lend to consumers. As the rate increases, lenders will pass the higher rate along to consumers, which in turn leads to lower borrowing by consumers due to higher rates.
- phdp 11y ago

chiph 11y ago

If they have a variable-rate credit card that has a balance on it, they might want to start paying it down to reduce their interest costs (a good idea in any case). If they have an ARM for their house they might want to look at what the lifetime interest rate cap is on the loan. Add that to the margin rate to find out what the payment could potentially go to. If they're not comfortable with those numbers, they might want to refinance now into a fixed-rate loan, or see how long they plan to be in the house. There will be hidden changes as well, as businesses will be paying more for operating loans, and this increase will be passed onto their customers. So food, entertainment, etc. costs will all go up. In short, pretty much everything you could buy just got a little more expensive.