Interest Rates have been on the rise lately moving up and out of 3’s and 4's and into the 5's for 30-year fixed rate loans. The reason for this can be viewed as good from the standpoint of our economy but bad as you qualify for less of a home loan. The reason the Federal Reserve (the Fed) raises interest rates is to slow down inflation in prices of goods and services is due to a higher demand for those goods and services. The reason the demand for goods and services goes up is because consumers have more money to spend with better paying jobs. When you finally hear that the Fed is raising interest rates you, most likely, have seen an increase in pay in one way or another. The increase is a reaction to events that have already occurred and is designed to slow the economy down.
When the Fed raises interest rates they are not raising your interest rates directly they raise the Fed Funds rate which is the rate that banks lend to each other. In turn banks raise rates to consumers on mortgages and on a positive side they also raise the interest rates on savings accounts. With higher mortgage interest rates your buying power diminishes for goods and services and housing. An example of what higher interest rates do to your Real Estate buying power would be; if your household income is $100,000 annually and mortgage interest rates increases 1% it will diminish your buying power by $60,000. Multiply this by all of America and you will definitely see a slow down in the amount of people that can qualify for financing to buy homes. However, if your income increases faster than interest rates it won’t really affect you. This would hold true for the 25-45-year-olds who are in careers that have a high growth rate. For those that don’t have high growth rate jobs you might get priced out of buying a home or must settle for a home in a lower price range.
The Federal Reserve will stop raising interest rates when they see inflation slow. This is not an exact science of regulating the economy through interest rates but it has been policy since the 1970’s. Most of the time they end up over tightening and the economy goes into a little recession then bounces back. This tightening and loosening of interest rates will continue until the Fed can find other quicker ways of identifying the triggers to inflation. With a strong economy currently and with gas prices rising and housing prices rising, and the rising prices of goods and services it looks like we should be in for higher interest rates for at least the near future.
The Fed has come out publicly and said that they intend to continue to raise rates into early 2019 unless the economy shows signs of cooling off. We are seeing rising gas prices as well as rising food prices so the likelihood of the Fed to continue with it’s rate raising campaign is still pretty good. Housing prices have started to level off with decreased demand for the high priced housing across the nation. I don’t see interest rates coming back down to the levels they were at this time last year until the economy slows. If you are in the market to buy a home here at MAE Capital Mortgage we have a program where you can lock your loan in while you are shopping for a home. This will allow you to look for a home without the pressure of rising rates. This is called our Lock and Shop program. We can provide this service for any home buyer in California so if you are in the market to buy a home this could potentially save you thousands of dollars. Call us today 916-672-6130.
As a consumer you might be asking yourself why loan officer compensation is important to me. The reason Loan Officer Compensation is important to you is simple and it boils down to your monthly payment. And for Loan Officers it is important to know how your compensation is derived as your manager may not give you a straight answer for one of 2 reasons; one he or she doesn’t understand how it works or; two they don’t want you to know how it works. This little blog may cause ripples in the industry but personally I have learned to educate people in the industry as well as consumers and not to hide anything is always the best practice. I write this with 34 years experience in the mortgage industry and have seen the good the bad and the ugly in this industry and we are going through another change and consumers should be aware of all of their options when it comes to financing and the right questions to ask. I think all would agree with the statement that consumers are best served with the lowest interest rates and fees as possible.
How does Loan Officer Compensation effect my monthly payment and why should I care? Great question, and the answer is a bit complicated, but it will be helpful to a consumer to know how to get the best deal possible when shopping for a loan. Loan Officers should know as they will be directly affected when clients go the lending source with the lowest interest rates. We need to start at looking at the current laws surrounding Loan Officer compensation and those laws have now been around since the Mortgage crisis of 8 years ago in 2010. These laws targeted Loan Officers but the laws were not equal in the way they were prescribed. For example, a Commercial Bank Loan Officer may or may not have an NMLS license and may be paid a salary and the Bank Loan Officer may also be in charge of several other types of loans other than home loans such as Auto Loans and credit cards. A Loan Officer that works for a Mortgage Banker or a Direct Lender, depending on the terminology, can can be compensated up to 3% of the Loan Amount by law. A Mortgage Broker can only charge 3% total to their company and the Loan Officer is paid from that. The difference is how much the respective companies can charge the consumer then how much the loan officer can add to the company profit margin for their compensation. The Commercial Bank Loan Officer has no control over how interest rates his or her Bank presents them to the consumer, however, it is safe to say that Banks having to maintain a nice consumer Branch and personnel have a high cost of doing business and generally have higher interest rates. The Mortgage Banker or Direct Lender has the same high branch operations that need to be covered in the profit margin before the Loan Officer adds his or her percentage to the interest rate and they can add up to 3% for themselves. The Mortgage Brokerage company has to be lean to stay in the game as the Mortgage Brokerage Company can only make 3% of the loan amount total to the company and the Loan officer has to be paid from that. Next, we will need to look at how and where interest rates come from.
This is where is gets complicated but if you are a consumer reading this know that you will generally always do the best if you work with a Mortgage Brokerage Company and here is why. As I said above a Mortgage Brokerage Company can only make 3% on a Loan transaction and the Loan officer must be paid from that. As a Loan officer you might be saying why would I ever want to work for less? Here is where the consumer will drive the answer to that question as a Loan Officer that makes more money per transaction at the Mortgage Banker you, the consumer, are paying for it in higher interest rates. As I stated earlier a Mortgage Banker or a Direct Lender, which ever terminology you wish to use, can make unlimited amounts of money to the company without regulation. Here is where you may have to read this a couple of times to fully understand what is going on. Having an understanding how interest rates are derived is important as all companies go to the same well to water their water, so to speak, to get their rates, and that is Wall Street. The basic interest market where Commercial Banks, Mortgage Bankers and Mortgage Brokerages get their interest rates come from the trading of large security pools of mortgages called Mortgage Backed Securities or MBS’s. These MBS’s are bought and sold every day all trading day long (from 9am est. to 4pm Est). These pools of mortgage have interest rates associated with each pool and are averaged to the nearest 1/8th of a percent. This is not a math lesson so I won’t go into the deep details of pricing, but this is where it begins. Banks and Mortgage Bankers who service mortgages (collect mortgage payments from borrowers) set the interest rates and the discounts and rebates associated with each interest rate in a 1/8th percent interval and they add their company profit margin on to those MBS rates and that is called a Wholesale Interest Rate. A Wholesale Interest Rate is the interest rate and fees that the company needs to make on each transaction as a minimum. A Mortgage Brokerage Company will go to these companies to find the best rates and deliver their loans to them and offer the Wholesale Interest Rates with their fee of a maximum of 3% (MAE Capital Real Estate and Loan only adds 2.5%) added on. A Mortgage Banker or Direct lender, on the other hand, is a company that will fund their own loans then either put them into a pool of MBS’s and sell them or keep them and service them. With those extra Origination expenses, a Mortgage Banker has, such as the cost of a Branch Manager, the branch rent, processing expenses and support staff will have to be added to the Wholesale Interest Rate before a Loan Officer is paid. The Loan Officer will then have to add his or her compensation costs above the branch costs this drives the costs up to the consumer thus higher end Interest Rate and fees. The Mortgage Brokerage Company will take on all the origination costs of the loan and will be able to use the Wholesale Interest Rate and simply add their fee to be profitable thus leaving the consumer with a lower interest rate and a lower monthly payment.
Now that you understand how Loan Officers and Companies are paid you can make a logical choice in companies you wish to get your financing through. However, since this is an industry secret you may be confused when you talk with companies and Loan Officers when shopping for a Mortgage. First, MAE Capital Real Estate and Loan is a Mortgage Brokerage and our regulator is the California Department of Real Estate and we do offer wholesale rate to our clients so you don't have to look farther than this article. As a Mortgage Brokerage we are required to hold 2 licenses to be able to offer Loans to our clients and Real Estate Services, those are a Real Estate Broker license and a NMLS License (National Mortgage Licensing System). A Direct Lender or Mortgage Banker, on the other hand, only has to hold the NMLS license. Another advantage of using a Mortgage Brokerage Company is that we have to maintain both licenses and with the additional knowledge we can help negotiate and explain the Real Estate process to consumers and even bundle our services to save them even more money. So, if you are reading this then you have found the key to finding the best interest rates as Mortgage Brokerage Companies in California have the ability to offer the lower interest rates. But don’t be fooled if you are calling around and get a Direct Lender’s Loan Officer and they call himself or herself a Mortgage Broker, you will have to ask them who their Business' regulator is and if it is not the California Department of Real Estate and it is the Department of Business Oversight then you are actually talking with a Direct Lender's Loan Officer trying to get your business. Call us today even if you are in the middle of a Loan Transaction we can analyze your transaction for free and let you know if you are not getting the best deal possible. Again, our phone number is 916-672-6130 and our website is www.maecapital.com we look forward to saving you money.
2018 started off with relatively low interest rates but in the last few weeks interest rates have been on the rise. The stock markets have hit record highs and the economy has added over 200,000 new jobs. Although the Stock has corrected and has become volatile in the last week or so it is still trending over 24,000 points, the highest in it’s history. So with the strong stock market and new jobs interest rates are rising to slow inflationary pressures, a kind braking system to the economy. In order to understand this affect to the equity markets (Stock Markets) and why it signals coming inflation, we have to break it down to why it is happening. As people make more money and buy more things that puts a pressure on the supply of goods and services and when there is a stronger demand for goods and services prices will tend to go up. As prices go up for goods and services the Federal Reserve will raise interest rates to slow the demand down as the higher prices for credit (higher interest rates) will slow people from purchasing goods and services, in theory.
The theory of fighting inflation by raising interest rates has been a policy of the Federal Reserve Board since the 1970s. So, when the interest rate markets see any possibility of inflation they will tend to start the process of raising interest rates in anticipation of the Federal Reserve raising them. This is what we have been seeing since the first of the year. Several events have happened to signal possible inflation in the future and as they unfold we see the markets adjusting to stay in front of what the Federal Reserve will do with interest rates when they meet at their monthly meetings. One of the major events that is signaling inflation is the lowering of the corporate tax rate to 20%. It seems people in the media and some closed-minded folks think that by lowering corporate taxes helps the rich some how when, in fact, it helps the American middle class people far more. This is simple economics that is not taught in our public schools.
To fully understand this, you must first look at corporations as tax pass through entities. When a corporation pays higher taxes they just pass that cost through to the consumer in the form of higher prices for their goods and services. Higher taxes also mean a big corporation will limit how much money they keep as profit in the U. S. as opposed to taking that profit in a country with lower taxation rates. The money saved by the lower tax rates will tend to keep the money in the US and will be re invested to hire more American workers and keep dollars in the US. Thus; more money in our economy for the American people to spend and eventually driving up prices causing inflation and forcing the Federal Reserve to raise interest rates to slow the economy down. You see, if the economy grows too fast then there will be a higher demand for goods and service than they can be provided and that will cause prices to go up. The theory has been to raise interest rates so the flow of money slows down with the higher cost of money. This is a confusing topic for most people that don’t have a degree in economics like your author, but if you understand these basic principles you can not only save yourself money, but you can make money by knowing what is coming.
So how does this relate to Real Estate you ask? Knowing the economics behind the economy you can make better decisions as to when to buy home for investment or when to lock in your interest rate on your home or when to refinance and save on your monthly payment. What this tells me about this year in Real Estate is that it should be a hot year for Real Estate Investment on both the Residential side as well as the commercial side of Real Estate. A smart investor will note the economy is starting to improve and more people will have more disposable income to invest thus driving up Real Estate prices. We have seen this happening in the residential sector for a few years now but it did not have to do with a strong economy as so much as the lack of supply of homes. We have seen builders come back into the markets where they can build, and the supply of homes has increased to offset demand. In the markets where builders can not build, due to lack of land, we have seen prices increase to astronomical levels. IN some markets the Government has kicked around rent-control which would limit the amount of rent a landlord could collect in a certain area. The result of rent control would be more run-down real estate, lack of new investment and corruption. The Government should let the free markets figure out where rental prices should be as well as values. As you can tell I am a firm believer in free markets and less government involvement as history has shown that when governments intervene in economics it causes markets to tighten as people and companies have to spend more for compliance of the government regulation that enviably hurts the very consumer they are trying to help. I know the what the argument is from the other side is but it makes no economic sense as every result of more government is higher prices to people, bar none.
In conclusion my advice to potential new home buyers is to lock in their interest rate as soon as they can when they are buying a home in this market. If you have been contemplating refinancing your home my advice would be to do it sooner than later as you will be facing higher interest rates. If you are looking to invest in Real Estate, again do it sooner than later as you will not only get a lower interest rate today than you will tomorrow, but the prices of the Real Estate Investment will be lower today than tomorrow. Interest rates will be common place to be in the 5%-6% range for residential homes in the next 30-60 days from February 7, 2018. For more questions on buying Real Estate or Refinancing or even commercial Real Estate give us a call and we will help you with all your Real Estate investment needs. Again, MAE Capital Real Estate and Loan 916-672-6130. Update to this article 2/22/18- Rates continue to rise due to all the factors listed above and now the Federal Reserve has also said they need to counter inflation by raising rates. I will predict that interest rates will be consistently in the 5's by mid summer. So if you are looking to refinance to take cash out to consolidate bills, pay for college, or home improvement I would suggest that you push up your time frames and get it done now so you can lock in a lower interest rate. It is simple, call one of our qualified Loan Officers and lock you interest rate in today. Update: March 5 2018, Interest Rates still are trending upward although not as fast as we have seen. Again the stance we are taking is to lock our clients in as soon as we can to get the lowest rate possible. As a Broker we are trending about 1-2 points lower in fees or about .125%-.25% better in interest rates than our Mortgage Banking friends.
The Federal Reserve has raised the Federal Funds rate by 50 basis points or .5% last year 2016, so what does this mean? Although the Federal Reserve does not control interest rates on homes, it does control interest rates that banks lend to each other called the Fed Funds Rate. During the same period interest rates on home loans rose by 50 basis points as well. The policy of the Federal Reserve Bank has been to use interest rates to quell inflation. This policy started back in the mid 1980’s with Paul Volker as Fed Chairman. The concept or policy is that if the Central Bank (the Federal Reserve Bank) senses that inflation is threatening the economy interest rates are raised to slow the flow of money thus keeping inflation at bay. This has been the Fed’s policy and it has been working, for the most part for the last 30+ years. The question should be asked if this should be continued or modified as our economy has gone more global than ever before and coupled with a National debt over 20 trillion dollars, does this policy still work for the American economy?
Let’s first look at what the effects of higher interest rates are in the American economy and then what it presents to a worldwide economy. In America in a higher interest rate environment it becomes less desirable for large projects to start as the higher cost of the money will have impacted the profitability of the project. For example; if a large development project is evaluating the costs to build and what the profit margin is going to be at the end of the project the cost of the money to complete the project will directly effect profitability. I addition, if they are going to borrow money at say 6% and the interest rates rise to 6.5% on a $100 million financed the difference in annual payments would be $500,000 a year. As you can see this dramatically impacts the profitability of the project. So, in theory, less projects will start in a higher interest rate environment thus less employment and less money flowing into the economy to push prices on goods and services higher. So, what you get is a general slowing of the economy under this theory that has been used by the Fed for the last 30+ years. What higher interest rates do to potential home buyers is cut the buying power for potential home buyers. With a .5% rise in interest rates the buying power of a home buyer will decrease by $30,000 on the average. So, with the new interest rate being .5% higher a potential home buyer will qualify for $30,000 less of a home. This combined with slower job growth from large projects not starting will slow the economy thus inflation.
Now what happens worldwide when America raises interest rates? This is the part of the equation that I believe has not been fully evaluated by the Federal Reserve system. It used to be if America raised rates other countries would follow thus keeping the dollar on par with other currencies around the world. Also, our debt was believed to be under control back then so other countries would just follow America’s lead. What has happened, and has not really been taken into consideration from our central banking system, is that more outside countries hold our debt and more outside countries have joined the European Economic Union, that did not exist in the 1980’s and some important countries have now left that as well. China has become a superpower as well. All the while, in America, our basic concepts of raising and lowering interest rates to the effects of our economic numbers has remained the same. My question to the Federal Reserve would be why have you not changed with the times?
With my degree in economics I have used these concepts to anticipate interest rate movements for the last 30+ years and I have been pretty accurate over the last 30+ years in doing so just from knowing these basic economic policies of the FED. I have also observed over the years that the numbers that the Fed uses to predict inflation have become more abstract than ever before. The Federal Unemployment number has been the bench mark for the Fed's analysis of interest rates and when to raise them. The unemployment rates, traditionally, show the percentage of people that are collecting Federal unemployment. The theory has been that if unemployment is low, under 6%, then America has been deemed to be in a healthy economy with a higher probability of inflation. Remembering that the concept of inflation is that if people are making more money they are spending more money thus putting upward pressure on prices of goods and services or inflation. The Fed has consistently used the unemployment number as a barometer of future inflation. Problem is that since our recession of 2008-2011 these numbers have not been accurate and the actual term or length of unemployment benefits that an out of work worker can get has gone up to 99 weeks from 26 weeks. What we have seen that, since the recession is people have gone back to work but at a far less wage then they had prior to the recession. This lowers the unemployment number but is not an accurate depiction of how that same worker may spend the wages they are now receiving. We have also seen a shift in family dynamics with one spouse staying home with children to combat the high costs of day care, thus taking that person out of the unemployment number entirely. So, although we have seen a significant decrease in the unemployment number we have not seen family incomes rise to the pre-recession levels and we have not seen the kind of inflation that should happen under a full employment economy.
With a rise in interest rates over the last few months we have seen the refinance market slow to levels that were pre-recession. It appears that most people have been able to refinance to the lower interest over the last 6 or seven years so the demand to continue to refinance has diminished. With higher interest rates it has become less attractive to refinance. One of the consequences of the higher interest rates is that the flow of income slows to the lending industry and will eventually lead to layoffs in the mortgage industry as it has been a strong market for so long that lenders have staffed to fill the old refinance volume needs and now with less volume they don’t need the staff. These folks will increase the unemployment number by May or June of this year as there is always a time lag when there are changes in the economy, hopefully the Fed does not do another increase in the meantime as that will lead to more layoffs. Although rates have risen interest rates on home loans are still in the 4’s which is still great, so if you have not refinanced and your current rate is in the high 4’s or fives, or if you need to take cash out of your house to pay for bills or college there is still time to lock into a good interest rate.
I am just scratching the surface with regards to the factors effecting interest rates and inflation in this article. I am a believer that in a global economy and the changes that have taken place over the last 30+ years we should be looking at interest rates from a different set of rules. Our Government has traditionally been reactive to changes in the economy as opposed to being proactive operating on a policy of ”it works until it doesn’t”. The result is government intervention to fix it, which has never worked and just has put America further into debt and burdened with a larger government with more and more government agencies than ever before. I don’t want to get political here but what has made America an economic superpower in the past was that people were free from government intervention to create new ideas and new products and services. With this freedom came the knowledge that if you fail, big or small, no one including the government would bail you out. This has changed radically with people looking to the government for solutions where they should be looking to themselves and realize that win or lose it is up to the individual to make things right, not government. We need to become more self-reliant than a dependent society. These factors also need to be factored into the Fed’s analysis of inflation and how to combat it.
So if the current Federal Reserve policy is to use the unemployment number as the main factor in determining whether or not they should raise interest rates we will be heading into an economy where we will see higher volatility with interest rates and the economy as a whole. With the Fed and Janet Yellen (Current Fed Chairperson) looking to raise interest rates again this year we will be looking to an economy that might be cooled off too much. Some inflation in a healthy economy is not a bad thing so long as wages can keep up with it. We can look too see home refinancing slowing down this year with the higher interest rates and hopefully home purchases don’t slow too much as that could put America right back into a recession. It is a balancing act for the Fed to change rates as they really don’t know what the end effects will be and if they have gone too far. As always this is just an opinion of a guy who has been in the mortgage industry for 32+ years and if you wish to comment feel free and if you have not refinanced we would love to assist you with that at MAE Capital Real Estate and Loan. You can call our offices directly at 916-672-6130 or email us at email@example.com. Post Script 3/20/2017 The Federal Reserve (The Fed) raised the federal funds rate by .25% which was anticipated by the markets. Since the Markets liked the only .25% increase the DOW Jones rose to new highs. The important part of the announcement was that they would be monitoring the unemployment rate and inflation throughout the the year and if they see any increases in inflation and significant decreases in the unemployment number they would then raise rates again. We can only hope the Fed doesn't raise rates anymore or it could significantly reduce the availability of housing and affordability. Key indexes that you need to watch to see if there is any inflation; one the stock markets, as this will increase wealth of individuals and they may pull it out and use the funds to purchase other items that could cause inflation. Watch the unemployment numbers and watch them per the season, as spring and summer should have seasonally lower unemployment but not too low where there is a higher demand for workers than there are workers to fill the demand, I don't see that happening but that will cause inflation. I see a steady healthy growth during the year if rates are not increased anymore.