Today I want to comment on the Federal Reserve’s forecast for mortgage interest rates and how they can affect housing over the next 2 years.
To give you a recap back in 2008 we were at the beginning of a national crisis that actually turned into a global economic crisis. In order to stimulate the economy from crashing completely the federal reserve took actions to lower interest rates. At the time the interest rates for mortgages were about 6 percent and they lowered it effectively 3 percent. The base rate or the federal funds rate went to .25 percent. The federal reserve never knew how bad the economy was going to get and they ended up keeping these rates low for an unprecedented 7 years.
They were waiting for the time when the economy would be strong enough to raise the rates to what they call a normal rate. Normal interest rates are anticipated to be around 6 to 7 percent. Last December the federal reserve increased the rate a quarter percent. This is the first time in 7 years that the rates have changed and they are anticipated to go up for the next 2 years. In fact, the forecast for the Federal rate is to go up 3 percent. That said the Federal Fund rate is currently at .50 percent and by the end of 2017 they think it is going to be 3.25 percent.
What does that mean for us? So far the .25 percent increase hasn’t had to much effect on mortgages so far. You can be assured the 30 year rates will creep up not at the same rate but they are projected to increase. Again, what does that mean for us; for those that have never seen rates above 4 percent for many years now it is going to be a shock. As rates go up it scares people and I think that’s why the federal reserve has been so reluctant to raise rates. I have been reading for years and have thought that the rates were going to increase but they didn’t. I think it is all based on the idea that, as rates raise it will slow the economy. We need a pretty strong economy in order to raise the rates. I know there are a lot of other factors in there, I am not a PHD economist, I just watch and understand the basics. I know that higher rates in essence mean higher mortgage rates and higher mortgage rates means it is more expensive to buy a home.
If you had a 1 percent rate increase, it could mean the cost to buy a home in terms of a mortgage payment would be 10 to 12 percent more expensive. Now the reality is I don’t think the Feds will raise rates nearly as fast or as strong as they have projected. My real opinion is the Fed will test markets to see how everyone reacts. I think rates will go up, that’s almost a guaranteed. I can guarantee one thing they can’t really go down, there is no where for them to go down. There really is only one direction which is up and whether that takes 2 years or 5 years I anticipate that over time rates will go up.
The conclusion is if you lock in now, you are going to have an incredible low rate for 30 years. You wont have to worry about the instability and the rates because you are personally locked in. If you are looking to buy I recommend you do it sooner, then later. If you do it this year you will be happier with the rate you get versus if you buy in a year or 2.