AS A MORTGAGE PROFESSIONAL, I am tasked daily with predicting the direction of interest rates. The public asks out of interest in the overall health of housing and the economy. Realtors seek this information as they, too, are frequently asked about interest rates and need to know for business planning purposes. Home buyers and folks considering a refinance want to lock in the best possible rate and will call me daily for updates.
So what do I expect will happen with interest rates?
The trouble with trying to predict is that there are so many variables and unknowns. For example, when the Fed announced last year that it would begin to slow its bond purchases, most expected interest rates to rise significantly. The thinking was that as the Fed reduced its buying activity, rates would have to rise to attract additional investor demand and replace the vacuum created by the Fed’s reduction in bond-buying activity.
The initial result was a sharp increase in interest rates last summer. But in the last few months, as global economic concerns have worried investors, the relative safety of bonds has sparked greater investor demand, pushing rates downward.
Predictions for interest rates tend to forecast that they will begin to increase moderately sometime next year as the Fed begins to raise the benchmark federal funds rate that has stood near zero since the end of 2008. The big question is, when will they begin lifting this rate, and how quickly? The consensus is that the economic recovery is fragile at best, and the Fed will be slow to raise rates — and could possibly even reverse course in the event the economy falters.
The big scary monster in the room is inflation. As the economy heats up, the danger is always that increased demand will lead to high rates of inflation that would dissolve investment gains from bonds and force interest rates up to compensate. Indeed, when the consumer price index for May was reported last week at 2.1 percent, a 19-month high, the bond markets were crushed and mortgage rates ticked up immediately.
Was the May reading a sign of greater inflation on the horizon? Many economists point to the lack of wage growth in this recovery as a sign that inflationary pressures will be kept in check. Simply put, if consumers don’t have the money to spend, demand will remain relatively stable. With demand stable, inflation also should be stable.
The one wild card is energy — a crisis in the Middle East or a disruption in oil supplies could lead to increased energy costs, resulting in higher inflation.
In reality, the Fed has long said that inflation around 2.00 percent was the target; 2.1 percent is relatively low and by itself not a reason for alarm. This is something to be watched, because it may force the Fed to begin raising rates sooner and possibly at a faster rate.
But if the economy falters or if an anticipated correction in the stock market occurs, the demand for bonds as a safe-haven investment will keep interest rates low. Bottom line: Barring inflationary pressures, and if the economy continues to show signs of life, rates should remain fairly stable until the Fed gradually begins raising them some time next year.
Guy Benjamin (CAL BRE License #01014834, NMLS 887909) writes a weekly column for The Herald, offering general information on real estate matters. As it is impossible to address all possibilities and variations, he will try to answer individual questions by readers who contact him at 707-246-0949 or gbenjamin@rpm-mtg.com.
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