The Party Might Just Be Ending for Low Interest Rates
It’s safe to say that mortgage interest rates have been at
historic lows since the summer of ’09, mostly around and sometimes even under
5%. Currently, they’ve been floating
around the 5 & 1/8% range.
Part of the reason for these low rates has been because the Fed
has been on a buying binge of Mortgage Backed Securities (MBS). The Fed has been buying $1.25
trillion in mortgage-backed securities in its effort to prop up the economy but
has said it will end those purchases March 31.
As
I speak fairly regularly with seasoned, well-informed, and intelligent mortgage
lenders and brokers, one thing they all seem to agree on is that the
expectation is that, after March 31st, rates will head upwards, and will likely be
in the 6% range.
Still
pretty low, historically – but, a significant impact to the buying power of
home buyers out there.
Just
think about it, if you’re looking at a loan amount of say $700,000, this means
that a 1% increase in interest rate translates to paying $450 MORE per month on
the same loan. Or looked at another way,
a 1% increase in rate just reduced the sale price you can afford by about
$80,000.
Quoting
some highlights from a recent WSJ article:
What happens when it (the Fed) stops buying hundreds of
billions of dollars in financial assets?
In its monetary-policy statement, the Fed said it would
“gradually slow the pace of these purchases in order to promote a smooth
transition in markets.” Suddenly cutting to zero, presumably, could prove
too much of a jolt.
But even a gradual pullback could have big repercussions.
Zero interest rates and Fed purchases — financed by printing money — have
played a massive role in reviving stocks and bonds and rekindling the economy.
Mortgage rates will likely move up, as private-market buyers will charge more than the Fed for
bearing the risks of holding government-backed mortgage securities. Now,
the Federal Reserve has said they would consider reopening its program to
support the mortgage market if interest rates spiked or the economy showed new
weakness
In its best corporate-speak, the Fed said they will
“evaluate the timing and overall amounts of its purchases of securities in
light of the evolving economic outlook and conditions in financial
markets.” That is, if markets play
along. Investors are already balking at the heavy use of printing presses. Just
look at the sliding dollar.
Realtor, Marathon Man, "Man of a Thousand Voices".
