In a move that surprised nobody, the U.S. Federal Reserveraised its benchmark interest rate for the first time in nearly a decade. While it may soon cost more to borrow, the news comes with a silver lining. An increase in rates indicates a strengthening economy. Therefore, the rate increase is unlikely to deeply affect the real estate industry as some have feared.
So before you become concerned about higher rates, consider how things may actually transpire.
What It Means For The Housing Market
The housing sector has benefited immensely from years of record low interest rates, including in 2015. Home sales are expected to exceed 5.5 million, which is slightly above the 5.4 million mark in 2014.
The quarter of a percent increase and additional small increases that are expected to occur in the coming year are unlikely to affect home sales. Consider: Even if interest rates were to reach 4.1%, the monthly cost of a standard $225,000 mortgage would increase just $26. Fifteen years ago, the annual average rate clocked in at 8.05%, but that was considered reasonable at the time. In fact, in the next few months, the looming possibility of higher rates might motivate some cautious buyers to push forward before the next rate hikes occur.
"When there's impending change, people are motivated to take action," said Jonathan Miller, president and CEO of real estate appraiser Miller Samuel. "A pending rate increase by the Federal Reserve provides motivation for fence-sitters to act more quickly than they might have otherwise. It's less about the impact to mortgage rates, but rather a more visceral concern or fear of being left behind."
What Does This Mean For Stocks?
The future of the stock market is uncertain. That is, there's no reason for investors to be scared, but it's a good time to invest in stocks that are likely to do well when rates increase.
Indeed, there are some sectors that stand to benefit from the Fed's recent announcement. Consumer-discretionary industries, in particular, tend to outpace the rest of the market during times of rising rates.
The apparel, retail and automobile industries are also likely to be among the market's top performers, as are so-called "defensive industries, such as food, energy and utilities. In addition, high-dividend stocks tend to do well in times of higher interest rates. Jay Jacobs, director of research at New York City-based Global X Research, said there's a correlation between rising interest rates and the performance of high-dividend stocks dating to the 1960s. "High-dividend stocks continued to outperform the market seven out of 10 times, and by an average annualized 0.78%," he said.
Among the best investment options is Johnson & Johnson. The blue-chip company pays a solid dividend, and is has some of the world's best-known brands in over-the-counter healthcare-related products, including Tylenol and Listerine.
The company's debt-to-equity ratio remains lower than the industry average. Management has done a good job of managing debt levels. Moreover, the firm managed to increase its net operating cash flow by more than 30% in the last year.
A mainstay of the U.S. oil industry, Chevron, offers a high-yielding dividend. To be sure, the company has been buffeted by low oil prices and announced in October that it would cut 7,000 workers, about 10% of its workforce. But it still remains a solid investment option.
There is no denying that the recent increase in interest rates will change the way the stock market and real estate market play out. Borrowing will certainly cost more and some companies are likely to benefit from the new environment more than others. But there is no reason to panic. At the very least, an increase in rates shows the Fed's confidence in the U.S. economy. It is a good sign that rates have started to edge up.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.