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Will Mortgage Rates Rise Soon?

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Posted On: 05/11/2016

QUESTION:

So far this year, mortgage rates have been well below 4 percent. Given the Fed’s efforts to raise interest levels when can we expect higher mortgage costs?

ANSWER:

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The Fed raised interest rates in December and it’s widely expected that the Fed will raise rates two times this year, down from the earlier estimate of four increases. Figuring a .25 percent increase with each raise, the general idea is now that the Fed will increase rates by .5 percent this year.

Such predictions, forecasts and guesses have several major problems.

For starters, just as the Fed is no longer expected to increase rates four times this year, likewise the latest predictions – two increases in 2016 – are not cast in stone. It could be wrong.

Also, keep in mind that Fed rate increases impact the banking system and most lending – but not all lending. Mortgage rates are a byproduct of market forces – supply and demand. They are not set by Fed and any governmental body. In fact, it’s not usual for mortgage rates and Fed rates to move in different directions.

It’s enormously difficult for mortgage rates to rise at this time because there’s cash everywhere and not much demand. In Europe and Asia more than $5 trillion is being loaned with negative interest rates. That means investors who put in $1,000 get back something less.

In the U.S., excess bank reserves amounted to $2.3 trillion in February, up from less than $2 billion in 2008. That’s money that is not being loaned. Why? No lender wants to make a long-term loan commitment at a low rate and rates are low in the first place because there’s relatively little demand to push them higher.

We could be in for low rates for a very long time. As Bill Gross, the noted bond investor with the Janus Capital Group, notes, “Our finance-based global economy is transitioning due to the impotence of monetary policy, which has always, and is now increasingly, focused on the elixir of low/negative interest rates.”

While low rates are great for borrowers they hobble savers and investors. Just ask anyone with an IRA or certificate of deposit. Low rates also hurt banks.

According to Gross, the “banking/finance seems to be either a screaming sector ready to be bought or a permanently damaged victim of write-offs, tighter regulation and significantly lower future margins. I’ll vote for the latter.”

If banks have those “lower future margins” then we also have the suggestion of lower mortgage rates.

Is this what will happen? We don’t know for sure, thus there is no way to say with any certainty when higher rates will be back – or what “higher” really means.

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