December 12th, 2013 3:40 PM by Richard T. Cirelli
Interest Rate Reality Check
The mortgage market has begun its slow ascent back to normal interest rates which should continue next year. The industry is expecting the rate on the benchmark 30-year fixed-rate loan to be near 5% later next year. Presently, they are in the low 4.00% area.
But, what do prospective homebuyers consider “normal”?
Expectation vs. Reality:
In a recent survey, a large national internet real estate brokerage asked prospective homebuyers what they considered a “normal” interest rate for a 30-year fixed rate mortgage. Their responses point to a rather large discrepancy between expectations and reality.
83% of respondents expected a normal rate to be less than 5.00%.
· Since 1990, interest rates have averaged around 6.7%
· Prior to March 2009, rates had never been below 5%
· During the 1980’s rates ranged approximately 10% to 18%
Clearly, the Fed’s easy-money policies since the housing crash has trained buyers to expect rates in the 3% - to 4% range. Alarmingly, more than 40% of the survey respondents said they wouldn’t buy a home if rates rose much further.
Having been around when rates were sky high in the early 80’s, I know that the perception of what’s normal will change as interest rates rise. However, it might be wise to start adjusting our minds now to a new normal.
Normal is not less than 5%! I do think the rise will be slow and choppy but the longer one waits to buy or refinance, the greater the risk that rates will be higher.
It’s the Fed activity of buying Mortgage-Backed Securities (MBS’s) as part of their stimulus plan called “Quantitative Easing” that has kept mortgage rates artificially low. As the economy gains strength, the Fed’s intention is to wean the nation off of this low-rate money. Lately, there have been signs of strength in the form of improved Employment statistics. The Fed meets next Tuesday and Wednesday and the financial markets are looking for some clarity in the Fed’s intentions as to when they will begin to taper their purchases of MBS’s. Look for that Fed announcement to be the driving force behind interest rate gyrations next week.