Mortgage rates have been very volatile lately and the net result has been an upward trend. Further complicating the matter are conflicting statements from a few Federal Reserve Governors sharing different ideas about the same circumstances. Some think the time has come to back off this round of quantitative easing by slowing purchases of bonds and another who thinks enough hasn’t been done and that much more easing is needed until unemployment figures get down to 5.5%. We all know rates will climb sooner or later; but when will it happen, by how much will it go up, and how will the markets respond? All of these are great questions that we won’t resolve here, and in fact, maybe nobody really knows for sure.
The fact is, it will end and rates will rise, and that will put pressure on the system to adjust. The good news is it will be largely positive when it happens. How do I know? Well, here is what I am thinking. Continued low rates have not really encouraged buyers to buy. If they had, the housing market would have been on fire long ago and prices would be rising much faster. The economy is still very fragile and people are not sure enough of the situation to make a commitment to buy a home. In fact, home ownership levels are falling and the pressure on rentals continues. While this would normally be a bonus for ownership, people are not certain that they won’t need flexibility in the current job market. More and more people have to move to where the jobs are. Some are nervous that being tied to a home and an area may prevent them from taking advantage of employment opportunities. So while owning may be cheaper than renting, some are willing to pay the price for now until they are more certain. At least until the housing market appears more fluid and the economy more stable.
So how would rising rates help? Well, rising rates won’t help as far as cost goes, but it will pressure the market on prices. As rates go up, people can afford less of a house for the same money. This will help keep prices in check helping to ease concerns over the possibility of another housing bubble. While I am not such a believer that another housing bubble is a serious concern and my feelings are that enough has been done to control the quality of the process, speculation will be left to speculators, not the average person taking a gamble. Those without the ability to repay a loan do not have access to the money needed to speculate. Far more restrictions are in place for those with weaker credit to become engaged in ownership. And, as rates go up, other investments will become more attractive to investors looking for a return.
Housing prices and rates can rise at the same time if they do so slowly. Confidence will grow if the economy grows. While Wall Street continues to set records, it’s not as much due to increasing profits, but more to the fact that there isn’t any place else to put the money. Rising rates will find interest from the private sector for bonds and the pressure of higher rates will cause some to react and buy before rates go even higher. Either way, rates will go up and likely so will the number of people looking to buy.
We don’t know what the future holds or have any idea what “normal” is today. However, we have a housing shortage as more people are returning home and many are waiting to form new family units. This is only a trend. It will change. And just like rates, nothing stays the same forever. We can only keep informed about the market and be honest with those seeking our counsel. Informed does not mean obsessed. Be aware and be honest. We are required to maintain situational awareness. We are professionals that can only provide solutions, based on the things beyond our control. Rates are just one of those things beyond our control. Just like credit, regulations, and compliance; we will adjust and move forward.