Real Estate

Why are rates going up?

The interest rates for home loans have drastically risen in the past couple weeks. Loan rates have been extremely low for several years and rates with rates tumbling over the last year, it is a shock to many of my buyers how fast rates have risen. Many buyers have asked my opinion on whether rates will go back down to the level they were at last month. And while I think there may be some volatility in the rate I also know that the market has been distorted by the government intervention. The following was a recent email I received from a lender that explains in layman terms why the interest rate has risen.

The magnitude of the rapid rise in mortgage rates has been shocking, but the reason is clear. To help stabilize financial markets and boost the economy during the financial crisis, the Fed initiated an unprecedented program to purchase enormous quantities of Treasuries and MBS. The added demand from the Fed distorted MBS markets and pushed mortgage rates down to historically low levels. In recent years, analysts have attempted to estimate the impact of the Fed’s bond buying on MBS prices, and some have said that mortgage rates would have been as much as 1.50% higher without the Fed purchases.
Now, the economy is no longer in recession. With steady economic growth, the Fed has indicated that it’s almost time to scale back (taper) its bond purchases. Investors are now trying to determine the “proper” level of mortgage rates in a growing economy in the absence of unnatural demand from the Fed. Unfortunately, most investors would rather be safe than sorry, meaning that they would rather continue to sell MBS instead of guessing if mortgage rates have moved “high enough”. From one point of view, mortgage rates are still just back at levels last seen about two years ago when the economic outlook was much weaker.
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