We’ve all been hearing about the historically low interest rates for the past few years, and lately we’ve been hearing interest rates are on the rise. However, national average interest rates are still just under 3.7% for a 30 year fixed-rate loan and 2.95% for a 15-year fixed-rate mortgage. This doesn’t sound too threatening, so what is all the buzz about?
As with everything in this world, the media and others have exaggerated the situation to make it a bigger scare than it really is. One reason the federal fund rates were increased was to wean investors off from more risky investments. With such low rates, investors were able to find much higher yields, which many believe to be a concern due to investors’ increasing asset prices. At the end of 2015, the Federal Reserve increased its benchmark interest rate for the first time in almost a decade, but only by 0.25%. This is not an increase in mortgage rates, but an increase in the rate that banks charge each other for overnight loans. The general public incorrectly understood this to mean an increase in mortgage rates.
Mortgage rates and Federal Reserve rates are not directly correlated, contradicting popular belief. There are many factors that play into the change of mortgage rates, and this is just one. Other factors include rate of inflation, the nation’s savings rate, the flow of foreign capital into the US, the federal government’s debt and annual budget deficit levels, and the country’s overall economic strength. The times that the federal funds rate can be more influential on mortgage rates are mainly only when the economy is in periods of prolonged economic stability.
Although many were wrong about the fast mortgage rate increases, most professionals still do expect them to rise over the next two years. NAR Chief Economist Lawrence Yun believes that interest rates will raise to 4.3% by the end of 2016 and increase to 5% by 2017. Even if we hit the 5% interest rates Yun forecasts, buyers don’t seem to be particularly concerned. What’s of greater concern to many though, is the decrease in affordability. With house prices rising an average of 7.5% per year and household income only rising 2% per year, housing affordability is decreasing.
So what do all these new insights mean? Bottom line, it means that the real estate market is in good condition, possibly even in a strong economic condition, depending on where you are located. With interest rates staying low, buying is certainly a great option right now. Many hotter markets are low on inventory, usually pointing to a Seller’s market. However, as all good investors know, the money is made on the way in. If your realtor can find a good deal, then it is still a great time to buy.
Ben Stoodley, Hard Money Lender & Realtor
DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of this site. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions.
