Many of my clients ask me my opinion of where rates are going.
The response I often give, which many of you have heard, is, “Forecasting interest rates is a little like forecasting the weather. If you want to know tomorrow’s forecast, it’s not too difficult. However, the farther out the forecast, the less likely it will be accurate.” Especially with how volatile the markets are today.
However, the government has added a level of stability to mortgage rates. There’s really only one thing that affects mortgage rates, and that’s the price of Mortgage Backed Securities (MBS for short). MBS’s are a bond that is sold as an investment. Rates are directly related to the price of these bonds. Rates move opposite to the price of these bonds, which means when the bonds are priced higher, rates are lower and vice versa.
Without getting into all of the details, the Federal Government has been purchasing these bonds since Fall of 2008, which is when mortgage rates first dropped below 5%. They allocated several billions of dollars to buy these bonds and have methodically purchased them over a period of time keeping rates betwteen 4.5%-5.125%.
This has been going on for over 6 months now. When the government’s initial purchases were almost finished, they announced they would be allocating more money to buy these securities, thus keeping rates in the same range.
What does all of this mean? Well, nobody can say for sure what their plan is, but it appears they are trying to keep rates in a certain range that stimulates refinancing and purchasing.
Here’s a question. At what interest rate do first time homebuyers get off the fence and decide to buy? 5.5%? 5%? 4.5%? How about homeowners who have been waiting to refinance?
From what I can gather from my own clients, anything in the 4-4.875% appears to get most people excited. I’m pretty sure the Federal Government has been watching mortgage applications and have noticed the increase we’ve had since rates have dropped.
Since they only have so much money to spend, it makes sense that they keep rates in a low range for a prolonged period of time. It doesn’t do much good if rates shoot down to 3% for 2 months then shoot back up. So, if they want people to buy and refinance, it makes sense to keep rates between the range where we saw applications increase dramatically, which is 4.5-5%.
I may not have a crystal ball, but my guess is 4.5% is about as low as we’re going to see on fixed rate 30 year loans. Even then, we’ve only seen rates get that low 4-5 times since they’ve dropped, which only lasts a day or two at a time.
So if you’re hoping for that 3.5% 30 year fixed, you may be waiting for a while. Does that mean it won’t happen? Absolutely not, but I wouldn’t count on it.
Just remember one last thing. Inflation affects rates. Many people believe a bad economy equals low rates. Ask anybody who took out a mortgage in 1981 how the economy was and what interest rates were then. Everything we’re doing now to fix the economy will become inflationary in the future. Even Warren Buffet said rates may go as high as they did in the late 70′s-early 80′s.
Here’s a link to the article where Warren Buffet talks about the economy and inflation…
Warren Buffet Article on MSNBC
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