Taking an Interest in Rates

 Photo Credit: Pexels.com

Photo Credit: Pexels.com

Rate Environment Today

The Fed is continuing to raise rates, taking the Fed Funds Rate from effectively 0 to 1.7% over the past two years, pushing up mortgage rates from mid threes to five percent.

The healthy economy is beginning to force the hand of the Federal Reserve to perhaps raise rates more than folks would like in order to slow growth that invites inflation. While this control is important, rates that move too high too quickly create shocks, especially for home buyers. This is unlikely to happen in the near future, but pressures continue to be present that will result in higher rates through the end of the year.

 The Federal Reserve’s “Dot Plot”

The Federal Reserve’s “Dot Plot”

The above is an aggregated projection of where members of the Federal Reserve predict the Fed Funds Rate will be over the provided timeline. Consensus calls for a two percent increase over the next three years, which could push mortgage rates up considerably.

How to Understand Rates

The most fundamental “thing” in the economy is interest rates. For real estate, this means the yield on the Ten Year US Gov’t (Treasury) bonds, or simply, “The Ten Year” yield. This interest rate informs mortgage rates, and ultimately, is viewed as a bellwether for the economy.

 Blue Line: 10 Year Yield | Red Line: 30 Year Mortgage Rate

Blue Line: 10 Year Yield | Red Line: 30 Year Mortgage Rate

Rates have been historically low and have begun to rise in 2018, which is expected to continue for the foreseeable future. In general, the above rates reflect the credit risk of the United States, or more simply put, gauge the health of the overall economy and more importantly, the outlook for the economy.

Rates that are rising are typically due to a strengthening economy, while declining rates generally are found in a contracting economic period. Daily and weekly rate fluctuations tend to reflect news events such as the Trump Tariffs, announcements from the Federal Reserve, or the daily deluge of economic information from various sources.

Economically speaking, rising rates result in higher mortgage rates, which can dampen interest and ability when buying homes, but can be offset by the fact that healthy economies generally mean rising wages and wealth, so the relationship between rates and home buying is not direct.

 The Business Cycle (credit: Corporate Finance Institute)

The Business Cycle (credit: Corporate Finance Institute)

Understanding where we are in the business cycle is critical. Unfortunately, there is not pure metric to determine where in the economic cycle we are. Given low unemployment, rising interest rates and healthy stock market, it’s safe to say we’re maturing into the peak (for baseball fans, read: somewhere around bottom 6th or 7th).

Agents certainly understand how much rates have risen in the last 12–24 months, but for those wondering if the economy and housing market is approaching a steep decline and swing back to a seller’s market overall, I do not think that’s likely. The Federal reserve has been transparent and raised rates carefully, unemployment is still low, corporate revenues are strong, the market is healthy, and low inventory is continuing to push asset prices higher. I do, however, think a recession is more likely than not in the next 3–5 years. What’s important is to not fall victim to recency bias, and expect the next recession to be as severe as the last. While it’s not a great time to be financing with floating rate mortgages, it’s still a great time to buy, and consumers shouldn’t try to time the market.

Why Agents Need to Take an Interest in Rates

Agents who can bridge the gap from real estate to finance will not only have a better grasp of their local market but be better able to understand country-level trends and understand shifts between buyer and seller markets.

Understanding if rates are rising or falling can help your clients understand the market climate, estimate their budget (if rates are rising, they may want to be more conservative), and be better prepared for conversations with mortgage brokers when it comes time to select mortgage products and/or lock rates.

While interest rates during the past decade have been historically low, an interest rate increase of 0.25% is quite normal during a home buying search. To put that in context, on a $250,000 mortgage, the monthly payment difference between 4.5% and 4.75% on a 30 year fixed rate mortgage is approximately $45. Over the past 18 months, rates have risen nearly 1%, moving from 4% to 5%. On the same mortgage this is a monthly difference of almost $180 dollars! In order to maintain the equivalent payment at 5%, your clients would have to drop their max buying price by approximately $30,000 (or perhaps the cost of that third bedroom)!

Agents can quickly do the above math and impress their clients at walkthroughs. There are plenty of apps and websites from which to choose, but we’ll look at MortgageCalculator.net:

 MortgageCalculator.net

MortgageCalculator.net

Familiarizing yourself with common interest rates and monthly payments at key price points (for example, knowing what a 30 year fixed rate mortgage monthly payment would be a $200k and $250k) will allow you to help educate your clients and compare properties.

Of course the mortgage banker is the ultimate source of knowledge, but how great would you look as an agent responding, “I know this property has a few more attributes, but at this higher price point it would be around $200/month more — is that a comfortable tradeoff for you?”