Over the past year, we have seen significant shifts in real estate purchases due to rising interest rates. Interest rates essentially represent the cost of borrowing money and play a critical function in the economy. Lower interest rates typically encourage borrowing and investment, fostering economic growth and employment. On the other hand, higher interest rates discourage borrowing and investment, which can lead to economic contraction.
The Federal Reserve, often referred to as the Central Bank of the United States or the "bank's bank," holds the responsibility of establishing monetary policy and making necessary adjustments to interest rates to support economic activity. The Fed's policy stance revolves around a dual mandate: maintaining price stability and promoting maximum employment.
In general, when the Fed observes a rise in inflation, it tends to raise interest rates, whereas when economic growth and employment are at risk, it tends to lower interest rates. These adjustments can impact the purchase of bonds, such as Mortgage-Backed Securities (MBS), which directly influence mortgage rates.
Currently, there is uncertainty surrounding market expectations for interest rates. The significant disruptions caused by the COVID-19 pandemic led the Fed to cut interest rates to historically low levels. When combined with the crash of 2008 and subsequent quantitative easing (QE) measures, we find ourselves grappling with high inflation levels. The uncertainty largely stems from various theories about our future trajectory. Some assert that we will swiftly return to a "normal market" with interest rates approaching the 5% mark.
Examining the history of interest rates, we have seldom experienced levels lower than the present, except for the period following the announcement of QE 1 on November 25, 2008, and the Fed's subsequent preparation for quantitative tightening (QT) until the end of 2021.
Interestingly, as of the writing of this article, the mortgage-backed securities that serve as an indicator for rate direction have witnessed technical levels falling below the price of those securities on the date when QE 1 was announced. In my opinion, this could signify a new ceiling for these securities and, consequently, a new floor for interest rates. In other words, there is a potential for interest rates to continue to climb slowly for the foreseeable future.
While it is highly possible that certain economic developments could spark renewed interest in long-term instruments like mortgage-backed securities, leading to a decline in interest rates, I view such a shift as short-lived. When considering the historical trends in interest rates, the United States has witnessed over 40 years of declining rates.
However, there is also the potential for a reversal, with 40 years of increasing interest rates. Nevertheless, I don’t perceive this as a cause for concern. By utilizing the 30-year fixed mortgage, investors in real estate can safeguard themselves against these rate increases. As Warren Buffett once stated (paraphrasing), the 30-year fixed mortgage is one of the greatest financial instruments because it represents a one-way bet.
If things go the way I believe they will, you will be safeguarded by a fixed rate. Should the situation reverse and improve, all you need to do is refinance. Engaging in any other course of action would simply rely on hope for the future, and hope is not a reliable business strategy. Instead, focus on controlling what you can for as long as you have control over it.
About the Author:
Aaron Chapman is a veteran in the finance industry with expertise in complex transactions since 1997. He is ranked in the top 1% of over 300,000 licensed loan originators and closes over 100 transactions per month. Learn more at aaronbchapman.com.
Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.
SecurityNational Mortgage Company, and its loan officers, unless individually licensed and specifically denoted in their credentials, are not qualified to, and are prohibited from representing themselves as accountants, attorneys, certified financial planners, estate planners, investment specialists, or tax experts, and will not advise you in those matters. Always seek the advice of a licensed professional. This article is for informational purposes only, contains the opinion of the author, not necessarily the opinion of SecurityNational Mortgage Company, and should not be construed as lending advice. Loans are subject to borrower qualifications, including income, property evaluation, sufficient equity in the home to meet LTV requirements and final credit approval. Approvals are subject to underwriting guidelines, interest rates, and program guidelines, and are subject to change without notice based on applicant’s eligibility and market conditions. Refinancing an existing loan may result in total finance charges being higher over life of loan. Reduction in payments may reflect longer loan term. Terms of the loan may be subject to payment of points and fees by the applicant. Aaron Chapman, NMLS#267844, SecurityNational Mortgage Company Inc., Co. NMLS# 3116, AZ Banker# 0904315, Equal Housing Lender. Any amounts, figures, payments, or loan terms stated are based on continually changing markets, rates, loan programs, and borrower-specific qualifications, and subject to change without notice. See loan officers featured for a personal consultation and accurate pricing.