The Current Interest Rate Environment

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What impacts mortgage interest rates and what impact do mortgage rates have on our economy

Over the course of the last several months we have seen significant changes occur in the our industries interest rate environment.  The majority of the reason for this has to do with the Federal Reserve making mention of “tapering” of their asset purchases(treasuries and mortgage bonds).  The Federal Reserve and their commitment to the purchases of treasuries and mortgage backed securities has been the primary reason that rates have remained at such a low level for such an extended period of time.  The mention of tapering along with an increase of positive economic indicators has contributed to a relatively swift increase in fixed mortgage rates.  It doesn’t take much these days to inflict a knee-jerk reaction in the market place and market movement seems to be just a Headline away.  Investors are watching the news and what is occurring right here in the United States as well as what is occurring around the world.  Global markets can have a significant impact on our market right here at home and a perfect example of that is the current concern over the Chinese economy.

Typically, the stock market shares an inverse relationship in most cases to treasuries and mortgage backed securities.  On the days when you see that the stock market in the green and moving in the right direction, interest rates are typically moving in the wrong direction.  Positive stock movement is great for your 401k….not so much if you are looking to purchase of potentially refinance.  In the same turn, negative stock movement is usually a good thing for interest rates.  The more drastic the movement in stocks usually indicates the more drastic the movement is with interest rates.

Anyone that is involved in watching financial markets knew that interest rates had to go up at some point in time.  However, at the same time, if you think about how important that the housing market is in this country, you have to realize that the increase in rates is a very sensitive issue.  The change in interest rates can potentially lead us to a more complete economic recovery but could also potentially lead us to a double dip recession as well.  The Fed knows that this is a sensitive issue and that is why they have been extremely careful with the information that they release and also how they release it.  The way that they “word” their “minutes”, which is a summation of their meetings, can send the market into a frenzy one way or the other.  A perfect example of this occurred in mid 2013 when they first announced the intention to start “tapering” their asset purchases.  In a very brief period of time, 30 year fixed rates went from the mid 3’s into the mid 4’s.  Historically speaking, mid 4’s is still fantastic but that big of an increase in a relatively short period of time is usually not a good thing….especially with a still recovering housing market.

As I previously mentioned, the housing market is such an important contributing factor in our current economy.  Think about it like this….if nobody is buying homes then the following will likely occur:  appraisers are not appraising homes, home inspectors and termite inspectors are not inspecting, real estate attorneys are not closing as many transactions, people are not hiring movers or moving trucks, consumers are not buying furniture and may not be spending as much at the home improvement retail stores, new homes are not being built and as a result contractors and sub-contractors are not working, when people are not working they spend less on groceries and other items that are not absolute necessity… all trickles down.

Interest rates will increase.  It is going to happen and hopefully it will be gradual, deliberate and strategic.  Ultimately, the increase in rates will be an indicator that our current economy is continuing to move towards recovery.  With that being said, we are still living in a low interest rate environment.  If you are looking at purchasing a new home or possibly still sitting on the refinance fence, it is likely a good time to move forward so that you can take advantage of rates that are still near historical levels.

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