Have you been diligently tracking mortgage interest rates? You should. They’re surging. Recently all the way up to 4.625%. That’s the largest weekly increase in FIFTY years! Just in January mortgage rates were 3.25%. There was no way to predict that they’d surge up 50% by 1.5 percentage points in less than half a year.
Mortgage rates make the biggest surge in 50 years! What caused this?
Three weeks ago, Federal Reserve Chief Bernanke stated something that startled mortgage interest rates. The announcement he made was, starting later this year and going through the end of 2014, that the US Federal Reserve plans to begin the reduction of the Qualitative Easing (QE) program.
That was the direct statement that rocked mortgage interest rates and sent them sky high! Just in the first week after the announcement rates jumped from 3.95% to 4.625% on a conventional 30-year fixed loan. Just 3 months ago those same rates were hovering around 3.3%, much closer to the rates in January.
If you’re anything like me, you’re nervous about the acute rise in interest rates.
No one really knows. I find myself assuming that they will continue to move upward (although hopefully not to the level they were in the 80s). Using history as a guide, we can form a bit of an answer.
Take a peek at the below graph. What do you notice about 30-year mortgage interest rates? There is an undeniable link to the Quantitative Easing and the rates of 30-year fixed rates. The average prior to the stimulus was roughly 6.5%, compared to today’s rates of 4.625%.
We can’t predict when and how much they’ll rise, or even if they’ll dip a bit more. But we do know for sure that the Federal Reserve at the end of this year is going to cease lowering it. It’s expected that the market will flux into an average rate. That will be a rate that is not directly influenced (really, controlled) by the Fed.
The Impact of Rising Rates on What a Buyer Can Afford
Are you a buyer? You must read the chart below. It scares me to even process this. A 1% rise in rates means the buyer loses nearly 11% in purchasing power.
How much did rates change between May 2013 and August 2013? 1.3% (3.3% to 4.625%). What does that equal? That means you can buy 14% less home. To put this in the figures of cold, hard cash: the buyer that was approved for $400,000 can now only afford $350,000. Ouch!!
Looking Back: 40 Years of Mortgage Interest Rates
The graphic below will encourage you that we’re still in good times. A rate of 4.625% is incredible to when my parents were buying their first home in the 80’s. Looking over 30 years of average rates we’re still enjoying good times. As we’ve been in the 3 percent range for a few years we probably have taken low rates for granted. I was just telling my buddy John—it’s time for those that have money to get more of it. If you have the money to invest in real estate, this is the hour. Remember—a 1% rise in interest rates means a 10.75% reduction in your buying power!
Over the past 40 years the average 30-year fixed mortgage rate is approximately 8.7%. It’s been at 6.5% the last decade—meaning being below 5% is still very good.
Tips for Investors, Buyers and Homeowners
- Homeowners: consider re-financing.
- The Federal Reserve has stopped keeping rates low
- Rates aren’t going to stay this low
- Rates are better than they have been over the past 30 year average
- If you’re going to buy, waiting even a month can make a big difference in rates.
- Count the cost and make a decision