3 Reasons Why Rates are on the Rise
/As expected, the Federal Reserve raised the Fed funds rate in March - the first of three expected rate hikes for 2018. It’s the sixth rate increase since the Fed starting pushing the rate back up in January of 2016 (from basically zero to now a tad over 1.5% - pushing the Prime Rate from 3.25% to 4.75%)
In short, the federal funds rate helps determine short-term market rates, as well as the interest rate borrowers pay on car loans, credit cards, personal loans and home equity loans. And although the Fed’s interest rate hike doesn’t directly affect mortgage rates, it influences other factors, such as the 10-year Treasury Bond – that do affect mortgages. And while these changes may only really indicate the mindset of the Fed with regard to where we are headed economically in the long-run, the point to grasp here is that our economy has human characteristics like emotion and is always moving. So we have to adapt and prepare. The questions we need to answer are what should we expect and how are we to properly advise our clients in navigating such murky economic waters?
Recently I came across a vlog (which you can find here) by mortgage industry executive, Barry Habib, who, in his video, highlights the 3 reasons why he believes rates are on the rise. In an effort to educate my colleagues and their clients, I’d like to share those very reasons.
Number 1. The Federal Reserve is going to be buying a lot less mortgage bonds and treasuries.While this began in October of last year, the Fed certainly ramped up this practice a few months ago during January, which puts an incredible amount of pressure on the market.
Number 2. Stock prices – which have recently been on the decline, could be due for an upward run. Bonds tend to move like a seesaw with stocks. When the price (or yield) goes up for one, it will go down for the other - and vice versa; which means that when stocks go up in value, bonds are hurt. This essentially affects interest rates for consumers. Barry believes the stock market is due for another decent run up – his advice? Keep an eye on the S&P – if we see it surging, that could mean higher mortgage rates.
Number 3. Inflation: It’s the arch enemy of interest rates. It eats away your buying power and is the bond market’s worst enemy. Barry believes we are due for a report later in April that will indicate higher inflation numbers – and just hearing it could spook bond markets.
So what can we do? Act now, but proceed with caution. Tread carefully and stay informed. As part of my dedication to the education of my clients and colleagues, it is my passion to advise others during uneasy economic climates. And it’s my goal to do all that I can to protect homeowners and potential home-buyers from finding themselves vulnerable to losses.