Mortgage Matters: Examining the factors driving interest rate increases (column)
August 3, 2018
I know, I know … I have been saying this for some time now: Mortgage interest rates are increasing. In my professional opinion, the increase to rates has been a bit overdue. But I do think it's important to keep where we are in context and to understand the entire situation, if you will.
For starters, there are countless factors that go into determining an interest rate for a specific scenario. Those factors include credit rating, amount of down payment or equity, loan program, property type, property classification, timeframe for closing, fees or "points" being paid to buy down the interest rate and the loan amount, just to name a few.
Mortgage rates more or less across the board are up from their historical lows by roughly 0.75 percent to a full 1 percent. For "most" scenarios, interest rates are now in the mid- to high 4 percent range. This level is up from the mid-3 percent range when mortgage rates were at their historical lows. While the mid- to high 4 percent range may seem a significant increase, today's interest rates are still not far from the bottom of the market.
When discussing the recent increases, it is also important to keep in mind that mortgage rates are based on open-market and global economic conditions. Long-term interest and mortgage rates are not set or predetermined by any one entity.
Although the U.S. government and the Federal Reserve successfully did their best to drive down interest rates from roughly 2008 to 2016 with "economic stimulus" and "quantitative easing" programs, those government programs are since done. The U.S. government is no longer buying mortgage debt straight from banks and lenders, which was the key factor in pushing interest rates down to their lowest historical levels.
Aside from government stimulus, there are also countless factors that move long-term rates and long-term bonds higher and lower. The overall health of the U.S. and global economies, oil prices, wage increases and decreases and employment figures and gross domestic profit data all factor into long-term interest rates. Of more importance right now are inflationary levels. Rising inflation is the sign of a healthy economy and is something that we have not seen in a quite a while.
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To illustrate this point, think about two key facts: Fixed-rate investments such as CDs, bonds and mortgage-backed securities pay a fixed rate of return. The rate of return on the investment does not fluctuate with the open markets and economic volatility such as stocks and real estate may. This perceived safety in the investment is the reason why many prefer this type of investment.
But also consider that by definition inflation is: "a general increase in prices and fall in the purchasing value of money" (www.websters.com). So if you have an investment that pays a fixed rate of return while the cost of goods and services increases, then the buying power of that fixed-rate investment diminishes. At which point, those selling the fixed rate investment have to increase the rate of return to entice more buyers. Case in point of what we are seeing right now.
Consumer prices or consumer inflationary levels in the United States are holding at about 2 percent (1.9 percent reported in June 2018 and 2.1 percent reported in May 2018). While this may not seem to be very much, steady 2 percent inflationary reports on the consumer or producer level are higher than we have seen in many years, not to mention this government measurement excludes the price of oil and food, if you can believe that.
This reading is the real culprit for the recent interest rate increases. Inflationary levels need to be monitored very closely, as they will indicate how quickly interest rates fluctuate from here.
William A. DesPortes works for Central Rockies Mortgage Corp. He can be reached at 970-845-7000, ext. 103, and firstname.lastname@example.org.