When interest rates change, they can change quickly. As a reference, see the interest rates tracked from May 3 to our current market. Rates on May 3rd were in the mid -low 3's, and are now in the low 4's. So, what happened? What does it mean to me? Have I missed an opportunity to improve my current loan?
Is this a good time to purchase a home? Should I be looking at shorter terms like a 15 year fixed instead?
We will address all of these questions and more.
So, what in the world happened with interest rates? How did rates start so low and end up so high?
As is often the case, the government got involved. There was a program that began in 2009 called Quantitative Easing, where the government was purchasing $85 billion in 10 year bonds each month with the intent of keeping interest rates artificially low. The idea was to supplement the economy with very inexpensive money and spur more spending. This opened up tremendous opportunity for home owners to refinance and lower their interest rate and monthly payment. It also opened up options for purchasing a home at lower monthly payments, and improved terms.
The net impact was a flurry of refinance activity in 2012 and in early 2013, as well as an improved purchase market. In combination with lower unemployment, the lower interest rates proved to clearly impact the economy, as home values rose sharply across the nation. Durable goods like cars and washing machine sales also jumped, and we appeared to be on the correct path.
Ok, so why did interest rates jump so much in such a short time if this was working?
Funding $85 billion in purchases of bonds each month gets expensive! The government had committed over $1 trillion with a t to the program and had to pay the piper.
Ben Bernanke shared commentary that the government would begin "tapering off" purchasing the bonds, and this sent a panic through the market that has yet to stop. For six consecutive weeks interest rates have climbed, and there has been next to little to indicate it will stop. His simple comments about unemployment and bond purchasing has impacted every international market, with Japan, China and much of Europe being negatively impacted.
Meanwhile, back here at home refinance activity has slowed down to a trickle, down nearly 70% in just 45 days. What does that mean? Well, less refinancing means less saving on monthly debt, and that in turn means less spending, which in turn means fewer new jobs. The long term impact will likely mean a slow down to home purchasing as well, as monthly payments rise sharply and will require more down payment to offset this.
Increasingly there is more discussion about whether the government moved far too quickly or if this means a positive step for the economy long term. Interest rates are intended to keep unemployment low (ideally at 5% or lower) and to keep inflation in check. The immediate impact is clear that inflation was already historically low and that unemployment was improving, so what will the market continue to show in the next 60-90 days?
What does this mean for me and have I missed the window to refinance or purchase with a great long term rate?
It has certainly been a drastic jump, and the way to find out options now is to consider paying costs and thinking longer term on rates. With the market continuing to climb, there is much more urgency to do something now before rates become unmanageable. Consider a 20 year term or a 15 year term, and look at putting more money down if you are purchasing a home. Also, the 7 year and 10 year adjustable loans have been terrific alternatives if you are purchasing a home with a shorter time window of keeping it.
As the government deals with international pressure to relax the drastic movement, we can expect almost anything at this point. We recommend more movement to shorter term loans, closing your loan as fast as possible, and considering adjustable rate loans as well. Find out how your qualifications have changed due to higher interest rates, and what can you afford as soon as possible. Home sellers will pay much more attention to your loan pre approval as well, so you will need to get the loan approval letter updated with the current market rate.
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When interest rates increase, it is usually intended to keep inflation (higher costs of anything you buy) from going up. However, inflation has been hovering around 1%, so the target had been 2% - and there is no reason for the increase from an inflation perspective.
The bigger issue of this was government debt, which at the rate of $85 billion of bond purchases monthly we were purchasing $1 trillion annually on this program. The mere thought of slowing down or eliminating this program (called Quantitative Easing) has sent the international markets plummeting for the past 6 weeks, and that is a much deeper concern.
If the cost of money goes up, then the cost of purchasing a home goes up. With so many markets seeing market value increases and multiple offers, it just got much tougher for buyers to afford their purchase. This is a major issue for first time homebuyers, who do not have the advantage of experience to know that these are still good rates.
Was the government premature in the tapering off of bond purchases? Certainly. Rate increases of this magnitude over such a short time will have long term effects, and in the next 60-90 days you will see a reduction or ripple effect from buyers.
IF the global economy continues to react negatively to this massive jump, then companies reduce their spending and hiring, and you could see a strong shift once again in higher unemployment globally.
The best move right now is for your fence sitting buyers to move quickly to avoid getting priced out of homes that they can no longer afford.