The two biggest concerns the Federal Reserve faces, by law, are employment and prices. Typically supply and demand dictates that in times of high unemployment, prices and therefore inflation stay low: essentially the demand for goods, especially those that are not considered necessities is down.
This is not only because of the number of people who are unemployed, but also the fear that it incites in others. Confidence in job security sinks as well, and overall consumers are more conservative with what they spend. As a result, the Fed keeps interest rates low, encouraging businesses and individuals to go into debt if need be to continue spending.
This is rough for things like savings accounts and certificates of deposit. However, it is a good time for investments like fixed rate mortgages. Long term, mortgage payments are lower, payoff rates faster, and equity is built more quickly. It is also a good time for refinancing, when you can lower both interest rates and payments from a higher fixed rate loan.
This means if you have money to invest at these times, in theory buying real estate is a great choice. As Tony Robbins says in his latest book Unshakeable, down markets are an investor’s best friend. They are when everything is on sale.
As unemployment decreases, prices start to increase with demand. By raising interest rates, the Federal Reserve intentionally slows growth to prevent inflation. The Fed did just that, raising rates in December and again quarter of a point in March. Most experts anticipate more raises later this year.
However, even in today’s tight credit conditions, the opposite of the mortgage for anyone days before the housing bubble burst, home prices are increasing in most major markets simply because there are fewer listings.
Mortgage Purchase Rates are Lower, Even Though the Fed Raised Rates
Even though the Fed raised interest rates, mortgage rates are still lower than they were last year, yet the refinance applications, a big percentage of the mortgage business for banking, are down 26% from last year.
Overall applications are down 11% from last year, and purchase applications are up just 4%. The reason is simple: although there is a strong demand for housing this spring, but until a couple of things happen: first, right now it is a seller’s market, since there are more listings than buyers. The number of listings will have to rise to help stabilize the market.
Second, prices will have to level out or fall. Consumers need confidence to buy, and as demand and prices remain high, many are nervous that one or both might be artificial and part of another housing bubble.
Mortgage Rates will Eventually Rise
As the Federal Reserve raises rates and attempts to slow the economy, mortgage rates will naturally have to rise as well. It’s a simple matter of economics, and how the banks make money. Even though they can keep rates low temporarily, long term this just is not feasible.
As rates rise, so will the overall cost of mortgages, both purchase and refinance loans. Those who refinanced at a lower rate certainly won’t do so at a higher rate barring the need to utilize equity for home improvements, a less likely situation as the price of other goods increases as well.
The Mortgage Credit Situation will Relax
The economy has seen two extremes. Before the housing bubble burst the only thing a buyer needed to get a mortgage was a pulse, sometimes not even that. Things tightened significantly to the current situation where good credit is usually not good enough, and stellar credit has become the standard.
To be competitive and entice more buyers, especially as rates go up, this situation will have to change. As credit restrictions ease, more buyers will be qualified. This will result in increased demand, and the market will have to respond accordingly.
What does it all mean?
The housing market is always in a delicate spot, and predicting where it will go next is extremely hard. Will there be another housing bubble? Will listings increase, meeting demand, or is new construction the answer?
Only time will tell, but increasing mortgage rates mean things will have to change one way or another.