Will History Repeat Itself on Rates?

Following the Fed's decision to raise its benchmark Federal Funds Rate in December, many wondered what this meant for homebuyers and homeowners in 2016.

History in the Making

After holding its benchmark Federal Funds Rate near zero for almost a decade to support the economic recovery, the Fed upped the target rate range to between 0.25 to 0.5 percent.

The Fed Funds Rate is the rate at which banks lend money to each other overnight. It is not directly tied to long-term rates on consumer products like purchase or refinance home loans.

So what does this mean for homebuyers and homeowners?

Home loan rates do not increase as a direct result of the Fed's decision. In fact, Leonard Kiefer, Freddie Mac's deputy chief economist, noted the last time the Fed raised its benchmark rate, it had a "delayed and muted impact" on the 30-year fixed-rate mortgage.

Instead, home loan rates are tied to Mortgage Backed Securities, which are a type of Bond. Many factors impact the performance of both Stocks and Bonds and play a role in the direction of home loan rates.

For example, an improving economy, higher wages and higher inflation could all cause home loan rates to rise. However, a faltering economy or turmoil overseas could drive investors to seek out "safer" investments like Bonds, which could help keep home loan rates low.

Another Historic Year for Home Loan Rates Expected

According to Fed Reserve Chair Janet Yellen, the move to increase the Fed Funds Rate "recognizes the considerable progress that has been made toward ... easing the economic hardship of millions of Americans." The increase also reflects the Fed's confidence that lagging economic factors will continue to improve.

As the economy continues to recover—or falter—the Fed will consider additional rate changes. Regardless of future Fed action, Freddie Mac's chief economist, Sean Becketti, expects home loan rates to "tick higher but remain at historically low levels in 2016."