How Government Policy Impacts Mortgage Rates

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Mortgage interest rates continue rising.  Other recent blog posts have covered the impacts of inflation, the Federal Funds rate, and stock market influences on mortgage rates.  Another major influence on mortgage rates is government policy. 

In 2008, the Federal Reserve implemented a program called “quantitative easing” (QE).  The Fed created money to buy securities like mortgage backed securities and public bonds from banks.  This new money increased bank reserves.  The idea is that the new cash would motivate banks to lend more money.  In buying new assets, stock prices would rise, and interest rates would fall, thus boosting investment further.  Given the trillions of dollars of assets purchased, it’s logical to assume that interest rates on all types of debt are lower than they would have been without QE.

The Fed ceased QE security purchases in October 2014.  A government policy used to keep rates low ended, and experts wondered if mortgage rates would increase.  But rates stayed near their historic lows until November 2016.  Rates rose quickly after the election by almost a full percentage point, and then slowly retreated over most of 2017.

In October 2017, the Fed began “normalizing its balance sheet” by selling its securities holdings – selling the bonds purchased in QE.  Experts predicted this policy would have the reverse effect of QE:

·       Bond price decreases due to increased supply (as the Fed sells its holdings).

·       Falling bond prices lead to increases in bond yields, which translates to rising interest rates.

And that appears to be happening.  From a lender’s perspective – QE was great.  I loved quoting interest rates less than 4%.  And now it’s frustrating and stressful to see interest rates rising and continuing higher.  But it makes sense given the broader economic and government policy environment.

It is impossible to accurately predict where mortgage rates will go.  Sudden changes in government policy, international relations, etc. can cause mortgage rates to change direction.  Given that caveat, it appears likely that mortgage rates have truly left the historic low levels of the last few years and will likely not return there anytime soon.  I think it is logical to expect rates to continue rising for the short term.

So, if you know someone in Georgia who is considering a home purchase, it may be a good financial move to pull the trigger before rates go much higher.  Refer that someone to me and we can explore their loan options together.  We at Dunwoody Mortgage offer competitive rates in this changing environment, and as a small company, we can go directly to our executives to work out the best pricing “deal” possible.  In addition to competitive rates, we consistently deliver outstanding service to get home buyers to closing on time.

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