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When interest rates increase, it is usually intended to keep inflation (higher costs of anything you buy) from going up. However, inflation has been hovering around 1%, so the target had been 2% - and there is no reason for the increase from an inflation perspective.
The bigger issue of this was government debt, which at the rate of $85 billion of bond purchases monthly we were purchasing $1 trillion annually on this program. The mere thought of slowing down or eliminating this program (called Quantitative Easing) has sent the international markets plummeting for the past 6 weeks, and that is a much deeper concern.
If the cost of money goes up, then the cost of purchasing a home goes up. With so many markets seeing market value increases and multiple offers, it just got much tougher for buyers to afford their purchase. This is a major issue for first time homebuyers, who do not have the advantage of experience to know that these are still good rates.
Was the government premature in the tapering off of bond purchases? Certainly. Rate increases of this magnitude over such a short time will have long term effects, and in the next 60-90 days you will see a reduction or ripple effect from buyers.
IF the global economy continues to react negatively to this massive jump, then companies reduce their spending and hiring, and you could see a strong shift once again in higher unemployment globally.
The best move right now is for your fence sitting buyers to move quickly to avoid getting priced out of homes that they can no longer afford.