Mortgage Interest Rates
With the spring and summer buying season upon us, many home buyers are out shopping for deals. Not only for a new place to call home, but also for the lowest mortgage interest rate. Luckily, current mortgage rates still remain extremely affordable and have just recently experienced a slight drop. While up nearly a percentage point from last year’s record low, they still remain some of the best rates that we have seen over the last decade.
What are Rates Forecasted to Do?
If only we owned a crystal ball for forecasting mortgage interest rates . . . the problem we are seeing in the industry is that analysts are split as to where they see rates going (whether they will go up, down or remain steady).
What makes up a Mortgage Interest Rate?
There are a number of different factors that go into determining the mortgage interest rate from one day to the next. For instance, we have recently seen a slight decline due to the decrease in 10-year Treasury yields. Other factors include the job market/unemployment rate, inflation, short-term interest rates, foreign events, QE3 and the Gross-Domestic Product (GDP).
The Federal Reserve and How Rates are Determined
While the economy continues to see signs of improvement, speculation continues to pull strings for the mortgage rates from day to day. For instance, when there was speculation made that the Federal Reserve would decrease its $85 Billion per-month bond purchase program, we saw mortgage rates increase. By the Fed purchasing the bonds, it has aided in keeping long-term mortgage interest rates low.
Let’s not forget about the other stimulus program known as “Quantitative Easing” or QE3. This program has been designed to print money to put into the economy (thus loosening the supply of money). But it’s not just as simple as the Fed purchasing U.S. Treasury bonds and mortgage back securities thus pushing bond prices up and interest rates down. The Fed has announced that this buying program will begin to be tapered down, thus mortgage interest rates have begun to increase.
Other reasons why the mortgage interest rates have been varying is the new Fed Chair, Janet Yellen, who recently took over the position from Ben Bernanke (as of February 1st of this year). The Fed targets inflation at 2% per year, however it is currently running below this target. Yellen has stated that rather than relying on a specific number (unemployment rate) threshold for the labor market, the Fed will instead utilize a range of market indicators to determine the strength of the market. Yellen has also remarked that she believes the economic recovery to only be ‘subpar’ and that lower rates will be needed for at least the near future. Basically when the Federal Reserve tightens money supply, then interest rates rise. Bloomberg recently predicted home sales will total 5.1 million this year which, if correct, would match last years numbers with a slightly higher interest rate on home purchases.
Attention: Potential Homebuyers
It’s still a great time to enter to the market! The U.S. economy is still on the road to recovery since the 2008 financial crisis. Housing prices continue to rise in several markets and the real estate market overall has continued to improve over the last 6 years. Seeing its best year last year in 2013. Most analysts predict that interest rates will be between 5% to 5 ½% by the close of this year and, furthermore, rates will rise to 6% or higher by the end of 2015. The interest rate numbers are still relatively low when compared to the historical range of between 6% to 8%. Because of the lower housing prices and interest rates, home buying remains affordable and the monthly mortgage payment for a home is very comparable to a rent payment.
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