Why Are Interest Rates So Low
We’ve been riding a wave of historically low interest rates for several years. Even during a pandemic, rates continue to drop, and that is helping keep mortgages affordable—even while prices continue to rise. Let’s take a look at a few of the key factors in determining and predicting mortgage rates.
The first factor to consider is the nation’s rate of inflation. Inflation is typically seen in a bad light, as nobody wants to pay more for the same goods and services they were once paying a lower cost for. However, inflation can indicate a strong financial market when the gradual increase in inflation matches a rise in employee wages. Investors watch inflation shifts and think about how the money they lend today will be returned at the end of the investment period. Rapid inflation is bad for investors because the money they lend today will likely be worth less when the investment is completed. While we have enjoyed relatively low inflation rates this decade, a slight uptick since 2016 appears to be heading back down as rates have been below 1% since the beginning of the pandemic this past spring. The usual relationship of supply and demand caused by low unemployment rates and increased spending haven’t quite followed traditional models, and some believe that globalization and technology are causes for a less predictable interest calculation.
If you had to follow just one factor in predicting housing market interest rates, I’d suggest watching the bond market. As investors have lots of options of where to put their money, mortgage backed securities sometimes fall short. Even though our mortgage market is strongly tied to the US bond market, they aren’t quite compared apple to apple. This is because it’s highly unlikely for a homeowner to be paying on the same loan for the entire 30 year term. Most first time and younger generation buyers are in their first homes for 5-7 years. This is because families grow, careers expand, and the need in housing changes along with it. Most investors will look at the 10 year bond market when looking at comparisons of the 30 year mortgage market. As bonds become more expensive for investors, they shift to mortgages. The simple supply and demand of increased mortgage options bring mortgage costs down. As bonds become more affordable, investors shift away from mortgages and we see mortgage rates increase.
Lastly, the Federal Reserve can be a factor in how our mortgage market reacts. Commonly known simply as “The Fed,” this entity adjusts several rates, especially the federal funds rate. You may remember earlier in 2020 just as we were heading in to the spring that the fed slashed its rate and made it exceptionally cheap for banks to make their overnight loans to other banks. While this isn’t directly tied to your home’s mortgage rate, the effect of money being cheaper to loan trickles down in to most markets. It’s the ripple effect that home buyers and owners looking at refi options get to take advantage of.
As full time Realtors, we frequently are asked where the market is heading and how it will look down the road. I wish we had a crystal ball and could hit the bulls eye with every guess. But even the most seasoned investors, bankers, and Realtors don’t have the capacity to make those predictions. Instead, we look to the past to see where the markets have been. We’ll analyze what is happening now, and draw educated conclusions about where things may be headed. A key piece of advice we regularly share is to embrace ‘the now.’ We know rates in 2020 have been phenomenal. We know money has been fairly easy to get, and numerous programs (including down payment assistance) are available to pretty much anyone who can meet relatively low financial standards.
Consider what buying a home today means. If you can afford a mortgage at todays rates and options you can begin building generational wealth through real estate, essentially lock in your housing expenses and not be at the mercy of a rising rental market, and have more predictability in your overall financial situation. If you already own a home, refinances provide options for funding college tuition, making home improvements more affordable, or consolidating higher interest rate debt. Reach out to our team anytime you are curious about the financial side of things. We have a number of local professional resources centered around finance that can offer a no cost, no obligation look into your situation and provide you with the info necessary to make sure you’re making the best decision for yourself and your families.
