What's Up with Mortgage Interest Rates
Until recently, it seemed as though we were in an eternal state of “Interest Rate heaven”. However, lately I have heard many clients register complaints about the current level of interest rates on 30-year mortgages. It sounds something like this:
Mortgage broker: “Mr. Jones the interest rate on your 30-year fixed rate mortgage is going to be 6.375%”.
Mr. Jones: “Wow that seems kind of high. Is that as low as you can get it?”
Let’s be realistic, folks. Mortgage interest rates like the ones we have experienced over the last 3 plus years cannot be sustained. In fact, the reason that interest rates have been so low is primarily because the economy has been in the dumps. Enter the Federal Reserve. Congress established the Federal Reserve in 1913 to conduct the nation’s monetary policy and to maintain the stability of its financial system, among other things. When the economy is not doing so well, the Federal Reserve steps in and uses its monetary policy to influence certain factors that typically have an impact on the economy in general. Those factors will, over time, tend to stimulate activities that will either cause the economy to grow or slow down. This is indeed what we have witnessed over the last few years. We have seen the Fed Funds Rate drop from over 4% down to 1% in an effort to stimulate our sluggish economy. The Fed Funds Rate is the rate that banks charge to one another on overnight loans of their excess reserves. When we see this rate drop the way that it has, the intended effect is to loosen monetary policy, which simply means that it is easier to get money. When it is easier to get money, typically the economy grows. Although the Fed
Funds Rate is truly a short-term rate, it is based on the Federal Reserve’s perception of the state of the economy. It does not have a direct impact on mortgage rates, but a residual effect based on the downstream impact on the bond market. Perceptions of the economy directly effect investment in both the bond and stock markets. The bond market is what primarily effects many mortgage interest rates.
As we saw during slower economic times, housing sales (both new homes and resale of existing homes) have been the saving grace. They have continued to provide a bedrock for our economy even though the economy in general was floundering.
Over the last several months, we have seen patterns that indicate our economy is indeed improving and showing evidence that the monetary policy changes, implemented by the Fed, are working to stimulate the economy. That is why we have seen increases in the Fed Funds target. Remember, economic improvement is a good thing. It means that more people are working, companies are investing in the growth of growing their businesses, people are buying things and yes, interest rates are rising. This is reflected in the latest job numbers which dramatically outpaced most economist’s expectations. Keep in mind that another residual effect of a growing economy is that people are earning more money!
Additionally, if you look at the history of mortgage interest rates, you will find that even in the 80’s, when rates were in the upper teens for a 30 year fixed rate mortgage, people were still buying houses. Many things have changed since then, including the number and types of available loan programs.
A mortgage will continue to be the cheapest form of money that individuals will be able to get. If economic predictions hold true it seems as though interest rates are headed to the mid to upper 6’s by the end of this year and possibly into the 7’s next year. But my question to you is: “Is 6.5% or 7% really that bad of an interest rate”? Finally, Central Florida continues to be one of the strongest and hottest real estate markets in the entire country and it is expected to remain that way for several years to come. My advice…there has never been a better time to invest in real estate in Central Florida.
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