In­ter­est rates up or down?

Home - Santa Fe Real Estate Guide - - MORTGAGEMATTERS - JIM GAY

In­ter­est rates will go up! So says Janet Yellen, the cur­rent chair­man of the Fed­eral Re­serve (the Fed). She did add that, as al­ways, this de­pends on eco­nomic data im­prov­ing. But if we look a lit­tle fur­ther than her pro­nounce­ment, we will wind up as con­fused about this as the Fed seems to be be­cause with only a few­months left in 2016, in­ter­est rates have re­mained low.

Sow­ill in­ter­est rates rise in 2016 or not? Fol­low me into a very sim­pli­fied dis­cus­sion of this very com­plex de­bate over an is­sue that will in some way af­fect all of us. What causes in­ter­est rates to rise and fall? One ofWall Street’s fa­vorite pas­times is try­ing to dis­cern hid­den mes­sages and mean­ings in the baf­fling lan­guage of the Fed, which has been wrong again and again on fore­casts over the past sev­eral years. In 2015, the agency pre­dicted that eco­nomic growth would be stronger than it has been in 2016, caus­ing in­fla­tion to rise. Fur­ther, the Fed said that with the pre­dicted growth would come less unem- ploy­ment and higher in­ter­est rates. Wall Street is still shak­ing it’s head.

Chas­tised and em­bar­rassed over fore­cast­ing er­rors, they have be­come less likely to pre­dict the fu­ture, both in terms of eco­nomic growth and in­ter­est-rate hikes. When rates were raised in De­cem­ber of 2015, af­ter nine years of level rates, the Fed’s Open Mar­ket Com­mit­tee, also headed by Janet Yellen, pre­dicted four more hikes this year. Now, how­ever, they are say­ing they with­draw that pre­dic­tion and are not likely to move up­ward with rates un­til 2017, if then.

To be overly gen­er­al­ist, the mes­sage is to buy now, re­fi­nance now, im­prove your home now, pur­chase a new car now, and spend on any other ma­jor items you have put off. With un­rest in our po­lit­i­cal cli­mate along with in­creas­ing costs of con­sumer goods comes the threat of a weaker dol­lar, namely in­fla­tion. With in­fla­tion threat­en­ing spend­ing and weak­en­ing of the bond mar­ket comes boosted in­ter- est rates. Rates have to rise to tame the econ­omy and strengthen the dol­lar. As the bond mar­ket weak­ens, mort­gage-backed se­cu­ri­ties sell off at a lower price, caus­ing in­ter­est rates to rise and af­fect­ing your cost of buy­ing a new home or any of the items I listed above. So far this year, in­fla­tion has re­mained at a non-threat­en­ing low and so have in­ter­est rates, in di­rect con­trast to Fed pre­dic­tions for 2016.

In the cur­rent low-in­fla­tion/low-in­ter­est-rate cli­mate, busi­nesses have been en­cour­aged to make cap­i­tal im­prove­ments, ex­pand, and hire, fu­el­ing the fire for more spend­ing. Hous­ing mar­kets across the coun­try have boomed, de­vel­op­ment has lead to con­struc­tion, and home sales have risen. It’s been a good run for those who have been smart enough to take ad­van­tage so far, and for those de­ter­mined to get in while the “get­tin” is still good.

En­joy while you can be­cause Fan­nie Mae’s most re­cent Na­tional Hous­ing Sur­vey, based on 1,000 house­holds, showed 46 per­cent of con­sumers think mort­gage rates will have in­creased by this time next year. “Buy now” has never been bet­ter ad­vice.

Jim Gay was a real-es­tate bro­ker for 20 years and has been a con­sul­tant to For­tune 500 com­pa­nies. He is cur­rently a bro­ker/owner ofThe Mort­gage Place, Inc. (986-9080) and can be reached at jim@ jim­gay­home­m­o­rt­gage.com.

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