Why Are Interest Rates Rising?

This is a question that is being asked all across America. For many market analysts, the recent increase in interest rates is no surprise. Why is that?

The Federal Reserve Board has done everything it can in the past five years to keep rates low so that we can heal from our severe recession and slow recovery. It lowered short-term interest rates to zero. The Fed also has purchased hundreds of billions of dollars of Treasury and Mortgage Securities.

The Fed’s plan to keep rates low worked. However, it worked because the economy remained slow and kept threatening to slip back into recession. The latest threats hit last year in the form of a recession in Europe and our own fumbling of the Federal budget – which became known as the fiscal cliff. Rates were higher during the first part of last year before the threat from Europe became severe. As the focus upon Europe eased and the election came and went, the fiscal cliff negotiations — or lack of them — kept the markets on edge. What if the Federal Government shut down?

Well, this did not happen. So we come into a new year with the crisis on the back burner and Europe out of the headlines, at least for the time being. The real estate markets are starting to gain some steam as new home sales, re-sales and prices are rising. A stronger economy translates into less of a need for record low interest rates. What happened in the past year is a function of rates adjusting downward because of fear and now that this fear is removed, rates are adjusting back to where they were.

And where they were was plenty low. Rates are still the lowest in history, except for the past few months which were governed by fear. Based upon what the Federal Reserve said when it finished the January 30 meeting, the Fed is not near ready to stop supporting low rates. So rates should continue to be historically low.

A word of caution here. Though the Fed will support lower rates, the Fed is powerless to stop rates from rising if the economy continues to strengthen. The past week or so reminds us of this fact.

A stronger economy translates into more employment and additional good news for many, but it also carries the risk of higher interest rates. We can’t predict what will happen with the economy from here and that is why we can’t predict the future of rates. If you think the economy and the real estate market is going to continue to get stronger, then you also think that rates are going up from here. This means that if you are thinking about purchasing or refinancing a home, you are best to take action today. A stronger economy brings higher home prices and higher mortgage rates. That relationship is not likely to change.

“Remember, I am never too busy for you or your referrals.”

Best,

Remigio P. Ferrara|NMLS 476380
Senior Loan Officer|McLean Mortgage Corporation