People always ask me what mortgage interest rates are going to do. I guess that makes sense because I am in the mortgage business. While at any given time, I do have my opinions and guesses, there are certainly no guarantees. That’s why when someone asks what rates are going to do, I usually answer, “They’re going to move, and they are not going to stay the same.” I’ve been right 100 percent of the time!
Most of you probably already know what Quantitative Easing (QE) is, but for those of you that don’t know, here’s the really short version …
In the past, prior to the 2008 financial crises, other countries perceived U.S. bonds and securities as a completely reliable investment – you might even say a flight to safety when their own economies were showing signs of weakness. Foreigners were so confident in our paper that they would buy up our issued debt. Our interest rates were (and still are) largely determined by what other countries were willing to pay – you could say that interest is a function of perceived risk associated with U.S. paper. After the crash occurred, other countries lost confidence in our economy and demand for our paper diminished – a lot. That caused interest rates to go up, making it much more expensive to buy a home. After buying homes at such high costs, people were left with far less disposable income, which caused the economy to suffer even more. It was like a vicious cycle that was feeding itself, at least until the U.S. government intervened.
Our government swooped in and began buying mortgage-backed securities. Basically, we were buying our own paper to keep interest rates down and stimulate the economy. This is what was referred to as “Quantitative Easing” or QE. In fact, roughly 70 percent of mortgage-backed securities were purchased by our government.
Over the past 12 months, our government has been gradually reducing the amount of QE through a process called “tapering.” This month QE will be completely eliminated by the government. There is a lot of speculation about the affects of ending QE. Nobody is really sure what will happen, but it will certainly be interesting to see how other countries are going to respond. Will they perceive our market and our dollar as safe again?
The good news is that, at least for now, we are still considered among the strongest economies in the world. Even after QE tapering, rates have remained lower than many professionals anticipated. The main reason rates have stayed low is that the volume of homebuyers (demand) has greatly decreased and remains very low. More people simply aren’t buying homes anymore.
Why is the demand for home buying going down? There are several reasons, but the primary reason is an upward shift in the average age of homebuyers. In the past, large numbers of young adults in their mid and even early 20s were getting married and buying their first homes. Today, there is a trend for young people to wait. They are waiting until later to get married, waiting to have kids and waiting to buy homes. Plus, many of them watched their parents lose money on their homes when property values plummeted. Owning a home is not perceived as an investment with the same level of reliability it once was.
Who knows what the end of QE means for the economy, for interest rates and for the housing market? I don’t know … but if I had to guess, I’d say that borrowing money is going to get much more expensive. So, here’s my advice:
If you’ve been thinking about refinancing, do it now while rates are still low. If you’ve been thinking about buying an investment property or a second home (at least in the near future) do it very soon. The government is done subsidizing rates and I don’t think other countries have the same confidence in our economy as they one did.
One thing is for sure, rates are going to move.
Patrick Stoy has 15 years of mortgage lending experience. Patrick is CEO of Wilmington-based Market Consulting Mortgage, which he started in 2005 with a mission to build lifelong customer relationships by providing real value. To learn more about Marketing Consulting Mortgage, visit www.macmtg.com. Patrick can be reached at [email protected] or 910-509-7105.
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