The Fed announces an interest rate hike. What does it mean for California consumers?
Credit card interest rates will go up. Home buyers will pay more each month for their mortgages. And there’s more increases to come as the year goes on.
The Federal Reserve Wednesday announced it would increase a key interest rate half a percentage point, an unusually big jump.
It’s going to be a jolt for most consumers, though not one they may see immediately.
Most rates, though, were already up in anticipation of the Fed’s action, said Song Won Sohn, president of SS Economics, a Los Angeles-base consulting firm.
Colleen McCreary, a consumer financial advocate at Credit Karma, said “the anticipated rate hikes are going to impact most people, making it much more costly for them to borrow, and the same is true for Californians.” But certain groups may feel the brunt of the rate increases more than others.
“Rate hikes can be detrimental to low income households and consumers with low credit scores, especially those who typically rely on credit to make ends meet,” she said in an email to The Bee.
“Remember, in this environment, the more you borrow, the more you’re likely to pay.”
While this rate increase may not dramatically change anyone’s buying habits right away, it’s likely to be another step in triggering a chilling effect on consumer behavior.
“It’s like being an MMA fighter,” said Matt Schulz, chief industry analyst at LendingTree, citing mixed martial arts.
“That first punch or kick probably won’t knock you out, but if you keep taking blow after blow after blow, you might end up on the mat before too long,” he said.
Here’s the outlook from the experts:
Housing
Mortgage rates in California could shortly climb to an average slightly from their current 5% level for a fixed rate loan, said Jordan Levine, chief economist at the California Association of Realtors.
That means someone buying a median priced home, projected this year at about $835,000, would pay about $800 more per month than if they had bought it when rates were around 3% at the start of this year.
The Realtors’ data showed that in Sacramento County, the median price of a home in the first quarter was $545,000, requiring a minimum annual income of $108,000. Monthly payment averaged $2,700.
In Fresno County, the median was $405,000. Minimum qualifying income was $80,400 and monthly payment averaged $2,010.
In Stanislaus County, the median was $460,000. Minimum income was $91,200 and monthly payment averaged $2,280.
In San Luis Obispo County, the median was $852,250. Minimum income was $168,800 and monthly payment averaged $4,220.
Levine noted that mortgage interest rates have gone up to roughly 5% or slightly higher in anticipation of the Fed action.
“Over the short run I think we’ll see sales hold up,” he said, because buyers are expecting the rates rise further, creating a sense of urgency for committed buyers to complete a sale before it becomes more expensive to borrow.
But as the year progresses, and the Fed raises rates further, Levine thought the trend “will eventually crimp home sales. Still in an excess demand environment. I do think at the margins there will be folks not able to absorb the increase in costs.”
Robert Lapsley, president of the Business Roundtable, cited another factor that could affect sales. “It could have more impact on the psychology of our housing market for first time buyers,” he said.
Credit cards
Lending Tree’s Schulz figures your current credit card’s rate “will likely go up in a billing cycle or two after this rate hike. If you’re shopping for a new credit card, you’ll see the effects even more quickly.”
He reviews about 200 cards each month, and found that less than a month after the Fed’s last rate increase, 75% of the cards had boosted interest rates.
McCreary of Credit Karma, said the immediate impact on credit card rates will be minimal, but consumers who have a “hefty” balance on high-interest cards may feel the pinch more.
McCreary recommends people with outstanding credit card debt to prepare by focusing on paying off balance or, as Schulz advised, consolidating it into a personal loan or balance transfer card.
“Personal loan rates are typically lower than credit card interest rates, and if you have multiple outstanding credit card balances, a balance transfer card often comes with a 0% introductory APR,” she said.
Car loans
While a half percentage point might not seem so much, Brian Moody, executive editor of Kelley Blue Book, said that this comes at a time when there’s other factors that are driving up the cost of buying and owning a vehicle.
Prices of cars and gas — which is still more than $5 per gallon on average in California — are high. Now with increases in interest rates, loans will be more expensive, he said.
Moody said more people will likely finance a larger amount of money for cars or may finance one for a longer period of time to lower payments.
“That’s difficult too because even though you lower your monthly payment, you’re going to end up paying actually more for the car because you lengthened your loan,” he said.
Savings
Those with savings accounts can bask in the bright side of the rate increase.
“Higher rates mean consumers who save this year will yield more returns than last year, and any bit helps, especially with inflation at a 40-year high,” McCeary said.
According to Discover, an online bank and payment service provider, when the Fed raises interest rates, banks may increase savings account interest rates, too.
But you won’t see that extra change pouring in immediately. You can check the interest rate you’re earning from your bank by the Annual Percentage Yield on your account.
This story was originally published May 4, 2022 at 11:46 AM.
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