Vail Daily column: Interest rates on the rise
Interest rates have risen and it’s President Trump’s fault. Wait a minute. Let me retract that statement. Mortgage interest rates have risen and it’s because of President Obama. Congress? The Federal Reserve board?
Make no mistake about it, mortgage interest rates have increased across the board since November. For example, the rate on a 30 year fixed rate mortgage has increased from roughly 3.5 percent in fall of 2016 to around 4.25 percent currently.
But why? That question and analysis will be studied for years to come. It is a very fascinating and complex question and answer; one that dates back many years and through many presidential administration both Republican and Democratic. But for simplicity’s sake, let me detail the reasoning with the following three points of explanation.
U.S. government stimulus is the first reason. In 2008 when the national and global economy went in to massive recession, the government and Federal Reserve Board took many actions. One of the actions was to stimulate the housing and mortgage industry to spur economic activity through home sales and mortgage refinances. They did so by taking unprecedented actions, purchasing mortgage debt and closing mortgage loans directly from banks and wholesale mortgage lenders. At the height of their stimulus, the government was purchasing $85 billion of mortgage backed securities from banks and lenders per month. Thus, an instantaneous demand for mortgage backed securities was created. This action replenished the supply of mortgage funds to lend and drove interest rates down to the high 2 percent and low 3 percent level. This stimulus has ended and the purchasing of mortgage backed securities is back to a free, open and global market commodity.
Extremely Low rates
Increases to the Federal Funds Rate is the second reason. At the December meeting, the Federal Reserve Board and Chairwoman Janet Yellen raised the Fed Funds by .25 percent to a range of .50 percent to .75 percent. Even with the increase, which is an indicator of an improving economy, the rate is still extremely low. This was only the second increase to the short term rate in the past decade.
All indications point to further increases going forward. While short term lending rates are one of many catalysts that factor into long term mortgage rates, the two rates are intertwined. The increase in December was also a catalyst for the spike in mortgage rates.
Thirdly, would be our newly elected President Trump. All personal opinions aside, the President does have a pro-economic growth platform. While it remains to be seen what he can accomplish, the feeling among investors across the broad is bullish right now. Case in point being the increase in stocks and equities. Simply put, when investor money flows into stocks, it generally does so at the expense of bonds. Therefore, interest rates on all types of bonds and fixed rate investments, including mortgage bonds, increase to attract more investors. With the Dow Jones Industrial Average being near twenty thousand, bonds rates and mortgage rates have followed suit by increasing in unison.
It is imperative to keep in mind that mortgage rates are determined by countless political and economic factors on a national and global scale. The three points outlined here are simply an effort to shed light on the matter. Where rates will go from here remains to be seen and is the topic for another column. So, stay tuned.
William A. DesPortes, of Central Rockies Mortgage Corp., can be reached at 970-845-7000, extension 103, and william@ds mortgage.org.