Rise of the Interest Rates – Part 2

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blog-author-clayjeffreys2

Like any good summer blockbuster, you need at least one sequel. As the End Begins for historically low interest rates (at least, today it appears that way), let’s take a look at what was probably the biggest influence on lowering interest rates.

The End (it seems) has begun.

The End (perhaps) has begun.

Way back in November 2008, the Federal Reserve announced a plan to purchase bonds. Interest rates dropped 0.500 in one day. Fast forward almost 5 years later, and the Feds are hinting at stopping this permanently. Actually, it is more than hinting. Some individuals on the Federal Reserve not only want it to stop, but want to begin selling the bonds they purchased.

As the Feds bought bonds, it increased their value and lowered interest rates. Way back when in 2008, I blogged about how interest rates were artificially low since the Feds were buying bonds and influencing the value. Interest rates wouldn’t be so low without the Feds involvement.

No one (not even the Federal Reserve) knew this bond buying program would last this long. The Feds have gone through stretches of buying… then nothing… a little selling… some more buying… their actions have been spread out over the years. Now, it will be difference. Sometime in the near future, the Feds will announce the bond buying party is over. They will also look to sell bonds.

Now imagine a bond market where new bonds are coming onto the scene AND the Feds are also trying to resell the bonds they have been buying since 2008. Sounds like a lot of bonds on the market? With that much supply, the demand will drop and so will all bond prices. Look for interest rates to dramatically rise when the Feds officially say the bond buying party is over.

In fact, the market is hedging that the announcement may come later this year. That is one of the reasons interest rates are inching upward… the economy is recovering, stocks are going crazy, and the Federal Reserve is itching to get out of the bond buying market.

Where does this leave those looking to buy a home? As interest rates rise, the purchase power of buyers decreases. In fact, over the past 30 days, buyers have lost 10% of their buying power. The monthly payment on a 30 year fixed mortgage is the same with a $330,000 loan amount with May 1st rates versus a $300,000 loan amount with today’s rates.

While you can’t control the market, I can get prequalify you today. Then you can get out there to look for your new home. Home prices are still low, and so are interest rates. Take advantage of this great combination while you still can.

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