October 18th, 2018 2:45 PM by Gregg Mower
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.