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Why Are Rates Still So Low?

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Posted On: 06/10/2015

QUESTION:

Mortgage rates were expected to rise this year, but so far that hasn’t been the case. How come mortgage rates remain so low, and what can we expect in the near future?

ANSWER:

As of late April mortgage rates have consistently been below 4 percent – well below.

According to Freddie Mac, the rate for 30-year fixed rate financing stood at 3.87 percent at the end of 2014 and rates at this writing are around 3.65 percent.

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In early January, while many were predicting rates above 5 percent for the year, I guessed and said “it’s entirely possible that rates will largely stay where they are and perhaps even fall” in 2015, a comment that should be hedged with three thoughts: First, so far, so good. Second, things could change. Imagine what would happen to interest rates if oil prices soared because of additional instability in the Middle East. Third, financial predictions are pretty much worthless; economic models are not necessarily more accurate than tea leaves.

A lot of attention has been given to the possibility that the Federal Reserve might seek higher interest rates. While it’s entirely true that the Fed has the ability to impact some interest rates, it does not set mortgage levels; instead, it’s merely one of many factors that impact real estate financing.

For instance, right now much of the world economy is, er, what’s the technical term? Oh, yes: awful. Those with cash are getting negative interest rates in Europe and Asia, while in the U.S. investors can at least get something. With “negative interest” an investor gives $100,000 to a borrower and gets back less.

The result of tough economic conditions abroad is that a lot of money worldwide is flowing into the U.S. and forcing down our borrowing costs; by one estimate U.S. banks have some $2 trillion in excess cash. With tons of supply and not a lot of demand it follows that rates are currently low.

What’s largely missing from the rates discussion is the matter of context. Imagine that rates jumped to 4.3 percent. No doubt marginal borrowers would be flushed from the market and there would be pressure to reduce both home sales and selling prices in many local markets.

That said, 4.3 percent is an astonishingly low rate according to historic standards. The real problem is not that the housing sector is “weak” or that mortgage rates are somehow “too high,” it’s that the economy has not recovered in a way that has improved the finances of average people. As the Census Bureau reports, median household income was $51,939 in 2013 – that’s “8.7 percent lower than the median household income peak ($56,895) that occurred in 1999.”

How can people pay more for homes if they have less income? Something has to give, and that “something” –at least for the moment – is the cost to borrow. As to what will happen with interest rates in the future, nobody knows for sure, including tea-leaf readers, economic forecasters and guesses from this writer.

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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