It’s something our team hears a lot – “interest rates are going up!” Sometimes that means mortgage rates and other times that means the Federal Reserve rate. Neither affects the real estate market like many people think.
First, let’s talk Federal Reserve. The Fed did hike interest rates in late September. When the Fed raises rates, they are raising the interest rates at which banks lend money to each other. So mortgage rates aren’t directly tied to the federal funds rates the Fed sets. The Fed’s actions do have an indirect impact on the interest rates available to the public – including mortgage interest rates. If the Fed increases the federal funds rate, it tightens the money supply and that can put upward pressure on mortgage interest rates. (The Fed can also tighten the money supply by selling government bills, notes or bonds.)
But Fed actions aren’t the only things that influence mortgage rates. Historically, inflation, economic growth, the bond market and housing market conditions are all factors which indirectly influence mortgage rates.
Right now, inflation is low and has been low – about 1-2% every year since 2012. That’s right at the Federal Reserve’s target of 2% with forecasts around 2% for 2019 and 2020. US economic growth is solid without being out of control…averaging around 2.25% per year since 2012. The Fed forecasts growth at 2-3% through 2020.
The 10-year Treasury note influences rates because investors compare its yield to the yield on home loans. 10-year interest rates have been slowly rising since 2012 – from just under 2% to around 3.2% in October 2018. These are still historically low – the 10-year Treasury note was generally well above 4% from the 1960s until 2008.
Now we come to housing market conditions. Generally, if we were to pick one measure of market health, economists would measure how many months of supply of homes are available. With less than a 6-month supply, home prices rise faster than inflation. The housing market has had less than a 6-month supply since 2012 – certainly a strong real estate market.
So, even with the Fed increasing rates, with inflation low and with growth solid, and with the 10-year note rising slowly and housing inventory low, mortgage rates will likely rise slowly and have a modest effect on the housing market.
In Part 2, we’ll talk more about the effect of mortgage interest rates on the housing market.