Remember that old folk tale Henny Penny? An acorn falls on her head and she thinks the sky is falling! Sometimes the smallest catalyst can create the biggest hysteria. I am beginning to sense that some of us have that mentality as we see mortgage interest rates increase. Some of you are starting to panic a bit. You’re feeling the pinch to hurry up and buy. Each day that you haven’t locked in an interest rate you hear ‘cha-ching, cha-ching’ and you can almost visualize your money flying away. I want to sit with you for a spell and help you gain perspective. My thoughts, facts and projections are all based on 30- Year Fixed Conventional loans.
Freddie Mac has been tracking lender interest rates since 1971. Friends, that is 47 years of pure statistics for us to gaze upon. Just a brief explanation of who this Freddie fella is : He is a government owned corporation that buys and sells mortgages. Why does good ole’ Freddie do this? He keeps mortgage capital flowing by purchasing loans from lenders which in turn frees up money for those lenders to continue to loan out $$ to qualified borrowers. It’s a whole system. You may be familiar with Freddie’s much older sister Fannie Mae. They have the similar goal of freeing up money for lenders to keep lending but they do operate slightly differently. So who on earth sets these rates? The Federal Reserve (think short term variable rates), investor demand in U.S. Treasury notes and bonds (think long term and fixed rates) and lastly the banking industry. I digress. This isn’t a blog about government run entities. A quick google search will heed all the answers you need on that front.
So back to the point. Yes, interest rates are increasing. Back in 2015 I refinanced my home loan at 3%. I’m feeling pretty awesome about that right now. We haven’t seen rates like that in, well, forever! First lets take a look at the overall picture from 1971 to present. This chart may look like a healthy person heading on a downward spiral toward death, but in the world of consumer mortgages this chart is a beautiful thing! In April of 1971 the average interest rate was 7.31%. Scoot a little to the right and you can see the peak of sadness in 1982 capping out at close to 18%. I’m sorry 2018 people…. did you soak that in? 18%…. for a house. If you purchased a home in the early 80’s you were feeling the pain. I sincerely hope you refinanced somewhere along the way. As you can see, since the early 80’s the interest rate has steadily declined to an all time low of about 3.4% on a 30 year fixed in 2016. Those of us who are newer to the market buyers (I mean in the last 10-15 years) have only know the joy of low rates getting lower. We haven’t had to endure double digit rates. A little history lesson about the early 80’s. The Federal Reserve was waging a war with inflation. The U.S. dollar was losing value fast. So in an effort to tame double-digit inflation, the central bank drove interest rates higher. As a result, mortgage rates topped out at north of 17%. There were a lot of creative lending practices going on during this time like seller financing and wrap-around mortgages. I’m sure this felt like a crisis to the everyday consumer. However, it was a controlled crisis meant to protect our economy.
So what does this all mean in 2018? If you are contemplating purchasing a home you can expect that the interest rate will increase as 2018 progresses. We have already seen 7 consecutive weeks of increase on 30- fixed mortgage rates this year. Perspective, we went from around 4.25% to 4.58%. There is again talk of inflation. Here’s a little blurb directly from CNBC’s website “Federal Reserve officials see increased economic growth and an uptick in inflation as justification to continue to raise interest rates gradually, according to minutes from the central bank’s latest meeting.”
It is certainly something to keep an eye on, especially if you are an active buyer. Why not go ahead an lock in while we are STILL AT HISTORIC LOWS? Please re-read and let that wash over you. We are STILL at historic lows. It turns out the sky is not actually falling. I suppose that is all relative. If you could have obtained a mortgage at 4% it stings a little to have to buy that same home at 4.5% a few short months later. Hey, at least we are no where near 18%! Looking ahead, experts are projecting that rates will hover in the low to mid 4% range for 2018. My advice, if you are in the market to buy, go ahead and get moving. Lock in as low as you can and sit back and enjoy your savings. Isn’t adulting fun!