What a Wild Ride

Things are supposed to get quiet as the holidays approach. But we had nothing but noise in the markets leading up to the holidays this year. It seemed as if the markets were on a roller coaster as we closed in on the end of the year. For example, the Dow was at 16,321 on October 13 and by December 5, it closed over 17,950. By December 16 the Dow had fallen to below 17,100 and a few days later it was up over 18,000. Meanwhile oil prices and interest rates were just as volatile. The precipitous drop in the price of oil has been discussed previously as the move has brought the price down close to 50% in just over a year.

Interest rates have also moved significantly in the past few months. Two major factors have influenced rates during this time. Stronger job growth has convinced the markets that the Federal Reserve Board will raise short-term interest rates during the first part of next year. At the same time, slower growth overseas and lower oil prices have contributed to a drop in long-term rates -- including rates on home loans. Following the lead of the stock market, long-term rates have drifted when the stock market experienced their downturns and the drop in oil prices, but there has been a lot of volatility on the way. At the same time, short-term interest rates have risen steadily in anticipation of action by the Fed.

So where do we go from here? The fact that short-term rates have risen while long-term rates have fallen this year demonstrates an interesting point. Just because the Federal Reserve Board raises rates, it does not mean that rates on home loans will be rising. The Fed directly controls short-term rates, but does not directly control long-term rates, though they can influence long-term rates significantly. If the markets perceive that the Fed is raising short-term rates in a direct response to the threat of inflation caused by a stronger economy, it is more likely that long-term rates will also rise. But if the markets feel that the Fed is raising short-term rates at a time in which the economic recovery is still in question, then the move in mortgage rates may not be as strong.

Wishing you a happy healthy and prosperous New Year.


Mike

Mike Ervin
Branch Manager/Mortgage Banker
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