Interest Rates & The Fed Exit

Print Friendly
Print Friendly

A great article by a good friend of IHRE…

Interest Rates – Two Weeks after the Fed’s Exit

by Steve Harney on April 20, 2010

industries waited to see what reaction the mortgage market would have to the Fed exiting its purchase of mortgage-backed-securities last month. Would there be ample demand from the private sector? At what price?

The predictions of where 30 year mortgage rates would settle were all over the map. Some called for as little as a ¼ point increase, while others were predicting as much as a 2 percent increase by the end of 2010. It is still too early to evaluate the impact, but let’s look at what we know two weeks after the Fed’s exit.

What has happened so far?

The Fed exit was gradual and well reported. Because of that, pricing was affected even before the exit. Rates started increasing as early as December last year and have gone up over ¼ point already. (Graph #1)

Rates spiked the first week after the exit, and many feared that was a precursor to a long and dramatic rise in rates. Rates dropped as significantly in the second week as they had risen in the first. (Graph #2)

Where does this leave us?

HSH Associates, a company that follows mortgage rates nationally, recently explained:

These kinds of “two steps forward, one step back” patterns aren’t unusual at all early in an economic recovery, but it is worth noting that as they occur, the general working range for interest rates does tend to tick slightly higher as time progresses.

A New York Times’ article last week titled Interest Rates Have Nowhere to Go but Up reported:

The Mortgage Bankers Association expects the rise to continue, with the 30-year mortgage rate going to 5.5 percent by late summer and as high as 6 percent by the end of the year … Some firms, like Morgan Stanley, are predicting that rates could rise by a percentage point and a half by the end of the year. Others, like JPMorgan Chase are forecasting a more modest half-point jump.

Even the experts can’t agree.

What does history tell us?

Below we have graphed 30 year mortgage interest rates over the last 15 years. Outside the last year (2009), where Fed involvement kept rates artificially low, rates stayed in a band between 5.83 and 8.05.

I believe that we will return to the lower section of that band at least. And where were rates immediately preceding government intervention? At above 6%.

What does this mean to you?

Please take into consideration the impact rising rates will have on the cost over 30 years if you are thinking about buying a first home or moving-up to a different home. Remember, a 1% increase in mortgage rates wipes out the savings on a 10% decrease in price. Perhaps you should make that move sooner than later.

Speak Your Mind

*