WILL INTEREST RATES GO UP, or will they go down? Will home values continue to improve, or will they stall at current levels or even decline?

Almost everyone I talk to in the housing industry has a close eye on the Federal Reserve, trying to anticipate the Fed’s next move — for the simple reason that the Fed has a lot of influence on the direction of interest rates, housing and our economy.

To give you an idea how interest rates affect housing, take a look at a recent report from the California Association of Realtors (CAR). The existing home sales and price report for April was released last week, and it reveals that April sales rose above the 400,000 mark for the first time since October 2013. This is interesting because the market was sizzling along in the summer of 2013 — until August, when interest rates spiked and caused an immediate slowdown in real estate activity.

Interest rates spiked that August in response to investor fears about the ending of QE2 — Quantitative Easing 2, initiated in the fourth quarter of 2010 to jump-start the sluggish economic recovery. QE2 had seen an unprecedented purchase of bonds by the government designed to drive rates down and stimulate the economy. The resulting drop in interest rates is credited by many for the housing market finally coming out of a historical five-year decline.

Fast forward to spring 2015. Existing sales are finally reaching the levels last seen almost two years ago, and interest rates seem to be creeping up again. Once again investors are watching the Fed, concerned about what will happen next — and specifically that sometime this summer the Fed will begin pushing rates higher.

They are concerned, too, about what the government plans to do with the $4.8 trillion in bonds they purchased in QE2.

Mortgage interest rates are influenced by the simple law of supply and demand. If there are more buyers than sellers in the bond market, rates go down. Conversely, if there are more sellers than buyers, rates go up. The concern now is that the Fed’s $4.8 trillion bond portfolio is 30 percent of the entire bond market. If the Fed were to start selling off their portfolio it would have the opposite effect of QE2 and drive rates up.

Home values are also influenced by the law of supply and demand. Many buyers exited the market when rates spiked unexpectedly in 2013, and the effect was a slowing of the rapid appreciation rates seen in 2012 and the first half of 2013.

CAR is reporting that the year-over-year median price for a single-family home rose 7.4 percent in April when compared to April 2014. In April 2014, home values were reported to have increased 11.6 percent YOY, and in April 2013 home values increased 28.9 percent when compared to April 2012.

So what will happen next is everybody’s question. Will the Fed start putting the brakes on the economy to slow it down and ensure we don’t see rapid inflation? Certainly many in the bond market believe so, as bonds have been marching in the direction of higher rates for several weeks. Will the Fed start selling off its portfolio of bonds, creating more supply and thereby increasing rates even further? This is a concern of many, and since there seems to be a bit of a herd mentality in the markets we could see rates move higher just on the fear of something happening even before it actually happens.

To be sure, whatever happens with interest rates will affect housing — and as the saying goes, whatever happens to housing happens to the economy.

Finally, whenever I write about interest rates, fees or terms, my legal folks begin to get nervous; so please know that this column is meant for informational purposes only, and any reference to interest rates is for illustrative purposes and is definitely not an offer to lend.

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 guyb@fairwaymc.com.

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