What is Going On With Rates?
/I keep hearing from clients that they need to get their home financing in place before rates go up. That may be the case and rates may in fact go up further than where we are now, but the reality is that rates have already gone up a good bit. With that in mind, I thought I’d share a couple of the reasons behind this so that you too are able to share with your home buying clients, in layman’s terms, why rates have already moved up.
The first thing to consider is that movement in mortgage rates almost always fluctuate based on anticipation. In other words, mortgage rates respond now to what is expected to happen in the future – a characteristic common to most long-term financial investments. So when change is anticipated to be coming, the mortgage rates respond now to that expectation. It is only when something happens that isn’t expected that will cause a rate change (particularly significant) in response to current factors. But most of the time, mortgage rate movement is tied to expectation.
In this case, it started back in November when the Fed announced that the purchasing of mortgage backed securities, something they’d been doing for over a decade (remember the term “quantitative easing”) since the big recession, would start to taper down and become a thing of the past. Without the Fed’s involvement on that front, it forces rates to be more tied to market and economic factors without the support of government assistance. The reaction will be somewhat of an unknown as we will be back to more of a traditional market – something we haven’t experienced in over a decade. And the assumption is that without the Fed support, rates will automatically move higher.
The other major factor right now is inflation. For the first time in over 3 decades, we are seeing a significant increase in overall consumer prices (cost of goods and services) – like right now, CPI is up 7% year over year (2020 to 2021). Historically speaking, the Fed has preferred that number to be in the 2-3% range to be considered “healthy”. A number that is over twice what is desired has to be addressed. And how does the Fed typically address this? Yep, with rate increases. So the second significant change coming our way is the Fed will soon (likely May) begin to increase the Fed Fund Rate, which is the rate banks borrow from the Fed to ultimately lend to consumers (banks will add their margin to the Fed Fund Rate and lend to the consumer at the Prime Rate). And even though that is a short-term rate, it is more about the sentiment of direction from the Fed versus the rate term.
Granted, there are many other factors that weigh in here – some that are traditional (like employment rates and economic productivity) and some that are not (like Covid and Russia attacking Ukrane). But the reason rates have moved up a full percent since mid-November is primarily due to the Fed’s announced strategy that will be used to both fight inflation and bring back a more normalized mortgage backed securities market. We haven’t seen either yet, but the anticipation has caused the change.
Hopefully this gives you a quick, common-sense explanation that you can share with your clients about why rates have moved up. The next obvious question is probably “where are rates going from here?”. That one is always tougher to answer. Hindsight is 20-20, but prediction isn’t quite so clear. My thought is that we’ll wind up somewhere between 4 - 4.5% for 30 year fixed rates (maybe by springtime) and then see how effective the measures being put in place by the Fed create the desired impact to slow inflation over the remainder of the year. Many times these actions create restrictions in spending and wind up in a recessionary period – at which point, the Fed will step in and lower rates to fend off a recession. So while I don’t necessarily see an end to super low rates, I do think we are going to have rates that are higher than what we’ve become accustomed to for the next several months. And that time period will depend on the economy’s response to the changes. If the measures the Fed puts in place work, we could actually see rates drift back down some by the end of the year. If an over correction occurs and we end up in recession, we’ll most likely see lower rates at that point – maybe 2023.
Regardless of what rates do going forward, we are still in a very good environment at this point from a historical perspective.And it doesn’t appear that values are coming down in middle Tennessee anytime soon.So probably still prudent to buy sooner than lat