21 December 2015,

Fed raises rate: Will it affect auction industry?

By NAA Staff

The Federal Reserve raised its benchmark rate in mid-December to range between 0.25% and 0.50% — a move that had been anticipated for months by many, including those within sections of the auction industry.

According to Fed Chairwoman Janet Yellen, the move came in response to the economy’s showing signs of “sustainable improvement.”

“The Fed’s decision today reflects our confidence in the U.S. economy,” she said during a press conference on Dec. 16, 2015.

While anticipated, the change won’t  go without affecting day-to-day life for the general public. However, it’s not so much a matter of if it will spur some effect, but how deep the effect will be. One of the useful measuring sticks the Fed and others can use moving forward is the auction industry. Buyers and sellers long have served as representation of markets and individuals’ financial situations.*

*That’s not to say it is as simple as when the economy is weak, auction activity picks up; or vice versa. In general, auction is the most efficient and quickest way to gain or move assets, and the industry has shown in the past its ability to thrive in strong economic climates just the same as it might in weaker ones.

So, with the Fed having outlined its general direction for the immediate and foreseeable future, what is in store for the auction industry?

Fed rate increase? “Ho-hum…”

“I think the initial reaction is ‘ho-hum,'” said National Auctioneers Association Past President Tom Saturley, CAI.  “Wall Street’s initial reaction is probably fairly instructive.  Up 220 points on the day of the event, down 250, plus or minus, the next.  In other words, the rate increase announcement appeared to do little to sway the market from its volatile ‘business as usual’ attitude over the past several months.”

That “business” appeared to take the announcement in stride had much to do with the increase amount, Saturley said.

“It’s important to keep in mind that the increase is only a quarter point,” said Saturley, who is also President of Tranzon Auction Properties, based in Portland, Maine.  “[It is] not a significant economic impact on many for either the mortgage payment they are making or on the savings account they are trying to build.  But, there are two issues to keep in mind.

“We are all human, and to have the Fed after seven years of not charging interest on the funds to finally change the model may be psychologically significant.  Do we react positively because it demonstrates our economy has finally recovered from this devastating recession or negatively because, despite the “good news,” the lingering “shadow unemployment” and failure of paychecks to keep up with rising prices results in the Fed having to reverse course?

“Which, is our second issue: time.  A quarter point doesn’t in and of itself have great effect, but the trend that the Fed creates as next steps, either in reaction to rate hikes or lack thereof, will be far more significant.”

Mike Brandly, CAI, AARE, is an NAA instructor in the association’s Accredited Auctioneer, Real Estate (AARE) designation program. And, like Saturley, he believes any immediate effects from the increase will be minimal — at least up front.

“The obvious direct impact of any rate increase is a lessening in demand for real property purchases,” said Brandly, who also is the Executive Director of The Ohio Auction School. “Indirectly, it means just a bit less in discretionary spending for anything — especially for adjustable rate borrowers and those just borrowing for new purchases.

“I foresee this increase sustaining for a while – years – and only going up again if we see any significant inflation. Most are saying this increase will have little or no impact on the overall economy, which is what the Fed hopes, I suspect.”

If the Fed’s decision and plan to gradually increase rates based on market reaction holds to form, it may come down to who may benefit more between auction buyers and sellers.

“Not surprisingly, the auction industry is a great barometer of our economy,” Saturley said. “If, as a result of the hike, consumer confidence continues to grow, auction prices from collectibles to real estate will result in happy sellers.

“Obviously, the pendulum swings both ways, and if sellers fear we are closer to retreat than a rally, we’ll have lots to sell and happy buyers.”