Statements made recently by the US Federal Reserve indicate that they intend to begin scaling up the federal interest rates within the next few months. These rates affect how big financial institutions borrow and make investment decisions. Changes in this type of behavior find their way to the consumer, who is charged interest rates based on how the lender perceives risk and anticipates growth in the upcoming years. This brings up an important question: When will mortgage rates rise?
Historic Lows Right Now, But For How Long?
In other words, a higher Fed interest rate will quickly spell higher mortgage rates for home buyers. Rates now are hovering around historic lows of 4 percent for a fixed rate mortgage. Federally backed mortgage corporation Freddie Mac anticipates interest growth to around 5 percent starting in June this year. This increase may not seem like much, but it can equate thousands of extra dollars over the lifespan of a 30 year mortgage.
People considering switching to a new home should act soon before the increase in interest makes buying marginally less attractive over time. As it stands, homeowners transitioning to a new home will have the bargain of a lifetime with rates far lower than the 8.5 percent average calculated since 1971.
Understanding the Fed’s Move
As stated before, the Federal Reserve benchmark interest rate sets the tone for borrowing and financial investment throughout the business world. Following the 2008 recession, rates were pushed down to almost zero to help stimulate growth and lower barriers to investment. Mortgage rates decreased in response.
The Fed also began a bond buying program in 2008 that intended to ease up the availability of credit and help keep interest rates low throughout the financial sector. Their decision to end the program in October of 2014, after nearly seven years, forecasts that they might ease back on their policy of suppressing the Fed rate to between 0 and 0.25 percent.
The Fed’s optimism stems from drastically improved economic conditions compared to the 2008 recession. In a recent statement, they noted that “labor market conditions have improved somewhat further, with solid job gains and a lower unemployment rate.” Despite this optimism, the Fed is hesitant to prematurely reverse their policies, predicting doing so too early would unravel some of the economic progress made.
What the Move Means for the Dallas/Ft. Worth Real Estate Market
Right now, the Dallas/Ft. Worth area real estate market weighs in favor of sellers. They often receive multiple offers for high-demand neighborhoods even before the home officially lists. An increase in home interest rates would ease some of the competitive bidding and upward pressure on home prices, but it could also shut out some families from the competition altogether.
Many people engaging in bidding frenzies now can afford some flexibility in their financing. Having more buyers unsure if they can secure financing can cause sellers to pass on their offer for others. In effect, waiting until mortgage rates increase could see home buyers being shut out from many of the homes they have had their eyes on.
Rates could easily float up to the 6 percent average they held in the years prior to the 2008 slump. Right now, the Federal Reserve has been vague about when they truly intend to start tinkering with their rates. But Chairman Janet Yellen has not so subtly implied that they are no longer going to be “patient” about watching economic activity to see if it stays healthy.
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