Rates, What We're In For

About every other call this week has been from a borrower who was nervous about rising interest rates. The headline news all week has been that mortgage rates are rising. Unsatisfied with the 3.625% rate we quoted them last week and holding out for the elusive 3.25%, they decided to take their chances and float. Now that rates have ticked up to the 4 % rates, they want to hold out longer still in the hopes of capturing anything in the 3’s. It’s sort of like putting more quarters in the slot machine in the hopes of getting back what you’ve lost. I’ve made the mistake in the past of predicting what rates might do in the future. However, this week I’m going to step out on a limb and tell you what I’ve been telling people all week.

A couple of years ago the Federal Reserve started buying $85Billion a month in mortgage backed securities in an attempt to get a struggling economy moving again. With the federal funds rate near zero and no place else to provide stimulus, this was a tool to keep long term rates on mortgages very low for a time. The housing market was in a slump second only to that of the Great Depression and the thought was(is) that keeping interest rates on mortgages ultra low would provide an incentive to buy or refinance which would put dollars into the  economy. Consumption is what makes our economy GO.

Well, it has been working. While the jobless rate is still too high to call normal, and 21% of sales are still distressed properties (compared to 5% in a normal economy), the stock market has been going up and up and up. Things are getting better. Originally the metric that the Feds said they would use to determine when they would stop propping up the mortgage market was a 6.5% unemployment rate. Lately, Mr. Bernanke and Company have been inkling that the buying might stop sooner than that. Wednesday, former Fed Chair, Paul Volcker, made the statement that the Federal Reserve is being forced to take on too great a role in propping up the economy with its bond buying program(QE3) and the bond market reacted strongly to this and the already circulating rumors. Rates ticked up to 4.0%.

Most consumers are probably not even aware of how mortgage rates are determined. It follows, at least in my mind, that they don’t understand that the current rates have been essentially held artificially low. If private investors, and not the Feds, have to come back into the market to purchase bonds with 30 year terms(mortgages) they are going to want a better return on their investment than the yields the Feds have been getting with QE3. Yield equates to rate and therefore, if the Feds stop buying, rates will rise. How high? No one knows. When? Depends on when the Feds stop buying. This week, rumor was enough to cause the price of the bonds to drop and the yields to rise. The markets are like old gossips and react initially and strongly to rumors and then correct for facts.

Rising rates are inevitable as long as our economy continues to gain momentum. The only question is when. We will be in a zig-zag pattern of rise, pull back, rise, pull back; but once it is clear that the Feds have pulled out or pulled back, rates will rise quickly. What I have been telling people is that the upside risk is greater than the downside possibilities. If you want insurance against a higher payment, Lock in. If you haven’t gotten off the fence, get going. 4% is better than 5%. –Kate Wilson

Kate Wilson  NMLS #240581

Kate has been active in the mortgage industry for over 23 years. She served on the Board of Directors of the Mortgage Bankers' Association and is a Past President of the Mortgage Association of Minnesota. She also spent 7 years as a business and life coach with Building Champions, Inc. where she coached some of the top producing loan originators and managers in the country.