*The above chart shows interest rates from 1960 to 2015, and if you click on the picture it will take you to a site where you can put in your own years and compare rates.
Buying a home is normally not a process that requires much political acumen. Over the last several years The Federal Reserve (our nation’s central bank), which is also referred to as “The Fed” has increasingly become a hotbed for political gamesmanship, as well as actual concern for people of differing perspectives. The Federal Reserve essentially sets the interest rates for lending in our nation, and thus when someone is getting a home loan the decisions of The Fed to adjust rates has a real life impact on average citizens, especially when purchasing a home (as this is likely the largest loan that an American citizen will ever take out).
So, with the recent update announcing that The Fed is likely to allow interest rates to rise after several years of keeping them unusually low (and saving borrowers money), at a cost to the American people. Having low interest rates has been a source of economic stimulus that is intended to be paid back later by the American people. With all of this said, you can observe the chart above where it measures the interest rates from 1960 through 2015. We are sitting at a very low level of interest at this time, and though it may go up it may not actually be as scary or ominous as some might make you believe. However, if you are intending to buy a home the time is ripe for getting a loan. The rates will almost assuredly not get any better, and will likely move in the other direction to some degree or another. I have included a mortgage calculator on this site in multiple places, but if you would like to play with the numbers and see how an interest rate hike will affect you feel free to play below:
How Will Interest Rates Affect Me?
My father Kent Carter has been a mortgage lender for over 30 years, and he has served as President of the Oklahoma Mortgage Bankers Association (OMBA). I of course think he is wonderful, but whether you contact him or someone else this should be the first step that you take if you are interested in buying a home and don’t have the cash to pay for it without a loan. I actually put that on my business cards – if I help someone find their dream home and we need to move quickly to make an offer it is pretty upsetting when they realize that not having a pre-approval letter from a lender means that they must wait and might miss out on a home that they want. So if you are looking to buy a home stop what you’re doing and ask a few lenders what their rates and fees are, don’t wait! Ok, I’ll stop so that you can read the article if you’re interested in learning about The Fed and the current politics of interest rates, but if you are looking to buy a home soon Please don’t wait to line up your lender, and feel free to let me help you buy your next home 🙂
If you’d like to read about a layman’s experience with buying a home in Oklahoma click the picture of the cute couple above, or Click Here.
Federal Reserve Decision: Fed signals that higher interest rates are coming
The Federal Reserve cleared the way for raising interest rates for the first time in six years, dropping the words “can be patient” from its guidance to investors.
But the central bank’s open market committee said a rate hike was “unlikely” at the April meeting. And while it has indicated that a rate hike could come as early as June, it might also wait until later in the year before boosting rates if inflation remains tame and below or near the 2 percent Fed target.
Higher rates have wide ramifications for global markets and for consumers, who could see higher costs associated with taking out mortgages and car loans.
Ever since the financial panic of late 2008 and 2009, the Fed has kept its target range for federal funds between zero and a quarter of a percentage point, the longest period ever of such low rates. Fed chairman Janet Yellen and other Fed officials have been saying they want to start moving rates back to “normal” levels.
The committee said it would raise the target range for the federal funds rate “when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.” It added that the “change in forward guidance does not indicate that the Committee has decided on the timing of the initial increase.”
The Fed has more modest expectations for the economy than it did just three months ago, an outlook that suggests a more cautious approach to boosting interest rates. It said growth “has moderated” while labor market conditions had “improved further.”
The Fed lowered its forecast for economic growth to a high of 2.7 percent in 2015 and 2016, down from an upper end of 3 percent it forecast just three months earlier. Unemployment was a spot for optimism. The Fed said that unemployment this year would edge down to a range between 5.0 and 5.2 percent, slightly lower than its December projections.
Over the past six months, low oil prices have helped keep inflation and inflation expectations modest, spilling over into inflation for other goods. The central bank lowered its own forecast for 2015 core inflation – excluding oil – to a high of 1.4 percent from a forecast high of 1.8 percent last December.
But it has said that the steep drop in oil prices was temporary and some professional economists have blamed bad weather in the northeast for causing gross domestic product to slip about one percentage point.
The open market committee also sought to reassure investors about interest rates beyond the next few meetings. It said that “even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.”
While it made scant mention of “international developments,” most economists said that the strong dollar and aggressive steps by the European Central Bank and Bank of Japan were already having an effect similar to a rate increase by curtailing U.S. exports.
John Canally, Chief Economic Strategist for LPL Financial, said that the Fed had provided “a spoonful of sugar” to help the change in phrasing go down easily in stock and bond markets. He pointed to lower interest rate expectations among the FOMC members.
In a survey of its own rate expectations, the 17 members of the committee indicated that their own forecasts for the federal funds rate were considerably lower than they were as recently as December.
Today, only four of the 17 said federal funds rates would be 1.125 percent or higher by the end of 2015 and seven of the 17 said the rate would be 0.625 percent or lower. In December, nine of the 17 said the Fed would raise the federal funds rate to 1.125 percent or higher.
The last time the Fed raised rates was 2004, said Canally. “That’s 11 years ago,” he said. “A lot of the guys on bond trading desk now were in high school. It’s a long time ago. There’s no institutional memory.”
That’s why he expects some volatility in stock and bond markets, even though, he notes, stocks have gone up in eight of the last nine years following rate hikes.
Much rests on the Fed’s decisions on the short-term federal funds rate, especially if longer term interest rates follow suit. Canally said that while higher rates would hurt borrowers, especially those seeking short term mortgages or car buying credit, higher rates could also help savers who have an estimated $15 trillion to $20 trillion of interest bearing assets.
Even in the housing sector, the impact of higher federal funds rates could be moderated by the decline in the business of adjustable rate mortgages, which Fannie Mae economist Doug Duncan estimates make up just 4.5 percent of the mortgage market.