Friday, January 20, 2006

Interest Rates... Up or Down?

Mortgage interest rates are a hot topic. Rates determine how much loan a potential buyer can afford. The amount of the loan will help a buyer determine a purchase price range. One of the driving forces of the real estate market over the last few years was cheap money. Fixed rate loans in the mid 5% levels allowed borrowers to purchase more home then if rates were at 7%. The low cost of money allowed home prices to rise as borrowers could buy more for the same monthly payment.
One of the main reasons the FED has been raising rates was to curb the appeal of cheap money which they felt would increase the risk of inflation. What the real results are is a form of controlling the economy based on asset prices. That is if the FED thinks the prices of certain assets.. usually stocks, bonds and home prices are too high they will implement a policy... higher interest rates geared to stop the rise in value of the targeted asset. The policy as stated by Timothy Geithner, president of the Federal Reserve Bank is "As financial markets continue to broaden and deepen, the behavior of asset prices will play a role in the formulation of monetary policy going forward, perhaps a more important role then in the past." For the consumer this means the FED may determine future rates based on where they perceive certain assets should be priced. Hmmmmm....

Mortgage rates are long term rates and the FED really controls short term rates so it can take some time for short term rate increases to affect long term loans. Long term rates are also connected to the bond and treasury securities markets.
This is why rates seem to bounce around. Currently rates have dropped in the last few weeks which may reflect a slowing in demand or merely a seasonal adjustment.

For the consumer I believe you will see rates bouncing up or down about 1/4 % over the next few months. I think you will see 30 year conforming loans around 6.25 - 6.5 and jumbo loans around 6.75 possibly through the fall. Much will depend on whether the FED continues to increase rates.

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