How High Will Interest Rates Go?
Jeff: How high will interest rates go?
Sammy: And how will those higher rates impact us? And stick around to the end to hear our projections on how high rates will go…
Jeff: Those are the questions that we are going to tackle in today's video. But first, Hi, I am Jeff Chubb and I am a retired investment banker turned real estate agent that has sold more than a 1,000 houses.
Sammy: And I am Sammy Iliopoulos with Guaranteed Rate and am one of the top loan officers in the country.
Jeff: So rates are rising Sammy… What is happening and how is it impacting all of us?
Sammy: Oh man! Lots to discuss and a very complex question.
Jeff: Well where do you want to start? Everybody just assumes that when the Fed raises rates , then mortgage rates follow.
Sammy: Like I said, it’s very complex. Let's first dispel any notion that the FED controls mortgage rates.
They can increase certain benchmark rates which will certainly impact short term borrowing costs such as cars, home equity lines or credit cards, but mortgages are not so easy…
Jeff: So then what happens? Does that mean all rates will eventually go up? If it’s a benchmark, then it has to start there right?
Sammy: Wrong again… Today, the prime rate is at 8.5%, the average 30 year fixed rate today is 7.325%. Big difference!
Jeff: So tell me what impact rates then?
Sammy: Lots of things… 1 thing is inflation. If inflation rises, then this deteriorates the bond value thus increasing the cost for the investor. Basically Inflation erodes the purchasing power of money.
When lenders lend money for a fixed rate of interest, they want to ensure that the value of the money they are repaid maintains its value over time.
If inflation is high, lenders may require higher interest rates to compensate for the expected loss of value in the money they receive in the future.
Jeff: Sammy please tell me that is it?
Sammy: Not quite… Mortgage loans are often bundled together and sold as mortgage-backed securities (MBS) in the financial markets. When inflation rises, the fixed interest payments on these securities become less attractive to investors because the real value of those payments decreases.
As a result, the demand for MBS might decrease, leading to lower prices. To attract investors back to the market, mortgage lenders might need to offer higher interest rates on new mortgages.
Jeff: WOW – so in a nutshell inflation is REALLY bad. But this makes total sense. Inflation can affect a consumer's purchasing power. If inflation is high and wages don’t keep up, consumers might have less money available for discretionary spending, including housing costs.
This reduced purchasing power could lead to decreased demand for homes, which MIGHT put downward pressure on home prices. To maintain profitability, lenders might raise mortgage rates to compensate for the potential decrease in property values.
Sammy: Correct. This means less options for consumers and it will be tougher to obtain these loans.
Jeff: I get so many people that have high down payments. That must be a good thing. I mean the more money down the better it is right?
Sammy: Jeff, you know me… there is always a “but” involved with everything. There is no such thing as a simple answer.
With regards to cash… this is another cause of inflation. EVERYBODY has it. Just because you have money doesn’t mean somebody doesn’t have more or the same.
Jeff: So where are the rates today?
Sammy: Well they are volatile. It's been like this for the better part of a year and a half.
Jeff: The reason for the volatility?
Sammy: During times of market uncertainty, lenders will demand higher interest rates to compensate for increased risks associated with lending. This can impact mortgage rates, especially if lenders become more cautious about extending credit. This is also in addition to an ever-eroding margin recently.
Jeff: What does that mean? And please be to the point.
Sammy: We are currently at a 24 year high for rates.
Jeff: Well that doesn’t sound good…
Sammy: What goes up, can certainly go down. We have seen the volatility become annoying but that doesn’t mean you can't buy a home at a reasonable price and at a decent rate.
Jeff: Yea I have been doing this for way too long and there is always a good opportunity out there as long as you want it. But sometimes the search can just take a little longer!
Sammy: I can't agree with you more.
Jeff: What are some of the ways you can combat this volatility?
Sammy: be pre-approved, be ready and be serious. There is so much opportunity.
Jeff: Yes! I love it when prospective buyers have it together. It’s a serious process. Coming into this with a lackluster attitude won’t be helpful in achieving your goals.
Sammy: Couldn’t agree more! Being ready and serious will make life easier when it comes to competing with other buyers.
Jeff: Tell me your thoughts on this… When rates do come down, this will create a new feeding frenzy and values will jump up.
Sammy: I can't agree with you more. Prices don’t tend to dip by hundreds of thousands of dollars.
Jeff: So give me some good news.
Sammy: There are more and more economists that believe rates will stabilize within 6 to 9 months and this will create an environment where we see a stable increase in value. Thus… be ready now. Don’t miss an opportunity just because your uncle thinks rates will dip in the 2’s in 5 months or the off chance that values will drop.
Jeff: Yes, I hear that all the time. It’s crazy to think about all the people in the last five years that I have talked to that have said they are waiting until home prices drop… Or all the people in the last year or two that said they are waiting until rates go down. Timing the market never works.
Sammy: Yes and think how much home values have gone up in those five years and how much mortgage rates have gone up in the last year and a half…
Jeff: All while they continue to pay a 100% interest rate on rent and get no upside on the value and lose all possible tax benefits. They really should talk to a top real estate agent in massachusetts.
Jeff: So, Sammy. Do rates hit 9%?
Sammy: I don’t think they are going to hit 9%. I think there is going to be a leveling off. I could see where rates hit 8.5%, but I don’t see them hitting 9%.
Sammy: I think inflation is going to be curbed. A big thing to think about is that student loan payments are going to start again shortly… This is going to suck up excess money… Specifically money that goes to discretionary spending out of the economy.
Jeff:That’s an interesting take on interest rates and something that I didn't think of with the student loans. Here are my thoughts.
Jeff: Interest rates are going higher. Inflation has slowed, but we will see the Consumer Price Index jump maybe towards the end of this year, but definitely in the beginning of next year.
Sammy: How so?
Jeff: The two major benchmarks in the inflation calculation, housing and energy are increasing. Housing is flirting with all time highs while energy prices are skyrocketing.
Sammy: So you are saying you don’t think the FED is done raising rates?
Jeff: Correct, the FED isn’t done because inflation hasn’t been stamped out. Inflation is hard to eradicate from an economy… Especially one this large. And quite frankly… We haven’t felt the pain that we need to in order to stamp out inflation.
Jeff: I don’t know exactly what that number is, but if the government keeps spending money and running deficits, then rates are going to have to go higher and higher. I see a world where 10% could be cheap and today's rates of 7 to 8% are a bargain.
Sammy: Well I hope you are wrong on that one.
Jeff: If you are thinking about buying your first investment property, then reach out as it would be a pleasure to talk. Yes, I only work in Massachusetts, but have very qualified associates all around the country that can help you find the perfect property.
Sammy: And I can help you in going over your financing options whether you are looking to buy from Massachusetts to California and everywhere in between. But if you are looking for a top real estate agent in massachusetts then you need to call Jeff Chubb.
Jeff: Great point as it wasn’t so long ago that you helped my brother buy his investment property down in Florida!
Jeff: You can also reach me at YouTubeRealEstateAgent.com and can find all of our information in the description below.
Sammy: Until next time.