What's Going On with Mortgage Rates?

If you're interested in buying a home any time soon, I'm sure you're aware that mortgage rates have been unfriendly as of late. We went from all-time lows to significant increases in the last few months. Unfortunately, the Fed is expected to increase rates again (perhaps even 3 times) next year. This is good an bad for a variety of reasons. As most things in life and business, there are benefits and frustrations any time that the US or global economy shifts. I've been trying to find a short yet concise article to explain this issue, but most of the articles I'm finding are very long form and not great blog post fodder. CNN Money is a go to of mine for easy-to-understand articles for any readers that may not have an extensive financial education. As expected, they have published a nice little article written by Kathryn Vasel entitle "Why you shouldn't panic about rising mortgage rates" which inspired this post. I'll try to give a little overview of rates, why they're fluctuating and what it means for both you as a buyer and the economy as a whole.

The Fed has a number of responsibilities. I'm just going to go through a few of the more significant ones here. The Federal Reserve is basically the US central bank. They hold federal reserve funds from various banking institutions, as well as the US Treasury. The various banks that have reserves there use those funds as loans between one another. They are sort of held in escrow with the Fed to ensure that there are no backroom deals being had between the various lending juggernauts. The US Treasury largely uses the Fed as their primary bank. They make deposits from tax funds from taxpayers and then debit that account with a variety of large transactions that keep the Government in operation. These are things like funding major infrastructure projects, paying Gov't employees and other major policy transactions. They are responsible for trying to maintain the US' national economic stability. They were initially founded as a sort of special branch of the Government to try to avoid national economic crises and panics like the Great Depression or the Great Recession that we recently faced. There are quite a few ways that they do this. But, the ones that most greatly affect the general public are that they are meant to regulate the big banks to ensure that they are not preying on the public via legislation and oversight (which they do well for the most part, but sometimes they get pressure from the market place that they're stifling the free market) and they set the market standard for interest rates on most types of credit lines in the US.

The reason that they control the standards of interest rates goes back to their primary goal, which is to avoid economic crises and panic in the nation. When the economy is struggling, the Fed will also the banks to reduce their interest rates in order to boost public spending. The more money that the public spends, the more secure the banks feel and the more tax revenue the Government experiences. When the Gov't in flush with cash, they intend to use that surplus of cash to try to continue economic growth (though this doesn't always happen). You and I would of course love for these rates to stay to stay low forever. However, the Fed knows that if rates stay too low that the public may begin to over leverage themselves, which could lead to financial trouble from the bottom up. So, they will increase the interest rates when they feel the economy is secure enough that the public can afford normalized interest rates. The great recession of a few years ago stagnated the economy so badly that the Fed allowed the banks to offer very competitive rates to try to get us back off the ground. They actually let us stay this way much longer than most folks anticipated. Now, they are telling us that they feel the economy has recovered enough to increase rates to more competitive percentages. Much of this is because the Government is a business in itself and we've amassed quite a large national debt over the last few years. An increase in these rates will hopefully allow a bit more stabilization across the board and the Treasury may be able to spend more time trying to reduce our national debt. 

I agree that an increase in rates in frustrating from an immediate perspective, especially because Rachel and I are hopefully going to purchase a new primary residence this Spring. However, there are a number of less selfish reasons to be thankful that this has happened. The most altruistic reason to be glad is that it will create more economic sustainability in the next few years to come. The reason that we experience such a bad recession a few years ago is because the Fed and other Gov't oversight committees lacked off and allowed lending institutions to provide a number of predatory loans that many folks were not qualified for. Eventually, the economy staggered and those folks had difficulty repaying those loans, which lead to sweeping defaulting payments across the board. The banks were then stretched too thin themselves and eventually they stumbled and that affected us all. The Fed felt is necessary to raise these interest rates now to prepare for the future by both having more available funds at their disposal, as well as keep the lending industry from getting to carried away. We do not want these banks providing too many loans that the public at large can not repay. Another reason not to panic is that while our rates have seen a noticeable jump lately (and will likely see more soon), we are still able to borrow at very competitive rates. Even a 5% mortgage rate is still quite competitive from a historical perspective. It wasn't too long ago that rates were often offered around 10%! Luckily, these increases aren't so terrible that it will snuff folks out from buying entirely. Even with around a .20% increase from a year ago, the monthly mortgage payment on a 200k loan will only increase about $20 per month. This could definitely knock some marginal folks down from one price point to another, but it should not stop people from being able to buy entirely. 

So, as you can see, there is reason for this increase in rates. I've heard a lot of people think that this increase means that we're not performing well financially on a national level, but it's quite the opposite. 2016 was quite strange as there were many happenings that led investors to feel the global economy is tumultuous. Bonds plummeted when Trump won the election while stocks skyrocketed. Brexit cause a significant ripple in global trade for many months. And there seem to always be some new diplomatic scandal that threatens tariffs and boycotts between major nations. But, all in all, the global economy and especially the US economy is doing quite well. My recommendation to those who want to buy in 2017 are to be very tactful and thoughtful with your taxes in the next couple of months and buy ASAP. Even another year from now could come another economic occurrence that send rates skyrocketing! In fact, I would suggest you speak to your mortgage lender because the way you file your taxes can have a huge impact on your borrowing power later down the line. This can last for 2 years depending on the types of loans you're pursuing. Let know if you need any help or need any recommendations.

I know I'm greatly looking forward to 2017 for business and personal reasons. The biggest occurrence of my 2017 will be marrying my wonderful fiance, Rachel. In addition to that, I have a few business plans that I'm very excited about and I will be working on my 2017 goals tonight!

As always, remember me if you're read to buy or sell residential, investment or commercial real estate in the Charleston area. 

Happy New Year!

-Troy Gandee