What do rising interest rates really mean?

Almost all of this year the "fear" reportings have been warning us of interest rates rising as though this is such a horrible event. The Fed was supposedly going to do this in March, then certainly by June; I'd thought they'd do it in September, as did much/most of the financial markets. When they didn't raise them in September, we saw the worst stock market performance of this year; the Fed didn't do what most everyone expected they would. It looked like they may put this off until January, so the stock market rebounded. Now the Fed has raised rates and stock market rallied, minorly but positively, as the Fed did what it seemed they had to; raise rates. The overall economy has improved and if you don't raise rates now, when would you? If the overall economy declines in the coming year, they then have some room to move back down or ease on rates to try to spur on new investments.

So what happens now? Will rates continue a steady climb up? Will all interest rates rise? How does this affect me?

It's possible interest rates could rise but most rates already rose this year, for almost all of 2015 and yet it's turned out to be one of the strongest years for home sales and appreciation locally and nationally in 9 years and one of the strongest overall for sales as a whole. So, rising interest rates aren't a killer of the real estate market or home values.

In reality, real estate rates are set by the Fed at all but based on Bonds and Mortgage Backed Securities. While these don't operate in a vacuum, they aren't directly related, correlated or affected by the Fed. Often mortgage rates will move opposite of the Fed. The bonds and securities affecting mortgages are like all other investments, a factor of supply, demand and alternatives. It's possible interest rates will rise further in 2016 but not by any dramatic amount. In our local market, rates are hovering in the 4.125-4.25% rate. This might raise another .125-.25% in 2016 but what this means is your monthly mortgage payment might rise by $30-$60 per month, depending on the size of your mortgage and what rates you're comparing. While any rise is unwanted, it's not likely that $30-$60/month will change your ability to qualify or interest to buy or sell your home, if your true desire is to buy or move. Don't let the "fear reporters" run your life or your expectations. The market will continue to be strong in 2016 due to organic growth of population, strong employment and the returning buyers who've been sitting on the sidelines waiting for the credit, savings and employment to improve since the economic downturn of 2007-2011.

It is not likely that the Fed will raise their rates much, if any further, in 2016 as the bulk of the world's economies aren't doing as well as the U.S. and as we raise the Fed rate, the U.S. Dollar increases in value and we make our goods more expensive to the rest of world, hurting  our companies and putting downward pressure back on stock values, the Dollar and our interest rates. These variables are all operating on tiny margins of stability, so only tiny shifts can be made without upsetting the balance of many, seemingly unrelated aspects to our economy.

The main point to recognize is that while I can no longer get you a 30 year fixed mortgage at 3.5-3.75%, I can still help you find a historically great rate, affordable to your needs and if you want the lower rates of 2014, we can find those in 7 year fixed mortgages, which might be as long as you may be in your next home anyway. If you plan to stay longer, then recognize the true nature of a low 4% interest rate and you'll see you're benefiting by the stronger economy, even if your monthly mortgage rises a little more than you hoped for.

Posted on December 17, 2015 at 9:41 pm
Paul Isenburg | Category: In The News | Tagged , , ,

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