Why Are Rates Rising?

Why Are Rates Rising? This is a question that is being asked all across America. For many market analysts, the recent increase in interest rates is no surprise. Why is that?

The Federal Reserve Board has done everything it can in the past five years to keep rates low so that we can heal from our severe recession and slow recovery. It lowered short-term interest rates to zero. The Fed also has purchased hundreds of billions of dollars of Treasury and Mortgage Securities.

The Fed’s plan to keep rates low worked. However, it worked because the economy remained slow and kept threatening to slip back into recession. The latest threats hit last year in the form of a recession in Europe and our own fumbling of the Federal budget – which became known as the fiscal cliff. Rates were higher during the first part of last year before the threat from Europe became severe. As the focus upon Europe eased and the election came and went, the fiscal cliff negotiations — or lack of them — kept the markets on edge. What if the Federal Government shut down? 

Well, this did not happen. So we come into the second quarter of 2013 with the crisis on the back burner and Europe out of the headlines, at least for the time being. The real estate markets are hot and new home sales, resales and prices are rising. A stronger economy translates into less of a need for record low interest rates. What happened in the past year is a function of rates adjusting downward because of fear and now that this fear is removed, rates are adjusting back to where they were. 

A stronger economy translates into more employment and additional good news for many, but it also carries the risk of higher interest rates. We can’t predict what will happen with the economy from here and that is why we can’t predict the future of rates. If you think the economy and the real estate market is going to continue to get stronger, then you also think that rates are going up from here. This means that if you are thinking about purchasing or refinancing a home, you are best to take action sooner than later. A stronger economy brings higher home prices and higher mortgage rates. That relationship is not likely to change.

Mortgage interest rates ended the week about .25% higher than they started. The technical indicators this week show that Mortgage Backed Securities (MBS) are oversold, meaning we should see some MBS market recovery. That's a lot of technical jargon to say that rates should rebound a little bit next week, but only a little bit.

BOTTOM LINE: Overall we are seeing mortgage rates trending up on signs of an improved economy and record stock market performance. There will be some windows of opportunity, but they are becoming fewer and far between. 

 

Mike Ervin

Senior Mortgage Banker

NMLS # 282715

Office: 650-735-5261

Cell: 650-766-8500

mike@mikeervin.com