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What Do We Do With 5% Mortgage Rates?
We’re going to take a break from our leadership series to give you an update on what’s going on in the economy. Much has changed in recent weeks and we want to keep you updated on those changes and what you could do in light of them. We’ve seen a big move in interest rates in recent weeks. Since the beginning of the year, long-terms bonds are up over 1% and maybe more importantly for listeners mortgage rates are up 2% and in some instances even more. To put this into perspective, we’ve seen the biggest percentage move upward in mortgage rates in a few decades as they hover very near 5%. With the volatility in interest rates right now, chances are good that the rate has even changed since the recording of this podcast. This higher move in rates is leading to a slowing of mortgage applications and a near drying up of the refinance market. With home prices already having increased dramatically in recent years, some buyers are having to take a step back from previous offers they have made because they can no longer afford the payment at a higher interest rate. There will continue to be some refinances based on people cashing out the equity in their home, but people looking simply looking to lower the rate on their existing loan will be hard pressed to find a lower rate than they have currently. Will this move cause a housing crash? It’s always possible, but not likely. There is still a great shortage of housing and that will not be solved overnight. I think a more likely scenario is that home prices slow their upward trend and eventually level out and maybe even dip just a little. Interest rates in the 5% range sounds high but is still cheap by historical standards. It does affect your mortgage payment to see an interest rate go up, but there are going to be some who have the ability to absorb that, but others will be forced to rent instead of buy because of the high prices on housing and the higher rates to go with that.
Not only have government bond and mortgage rates gone up – but the Fed recently raised the Federal Funds rate and in turn, the prime rate by .25%. They are poised to raise it another .50% in the month of May. If you are wondering what the Prime rate, it is a rate off which many business loans are priced. It has a big effect on how banks price both business rates and deposits. So how high will the Prime rate go? The Fed’s own expectations are that they will raise these two rates at least 2% to 2.5% higher than they are today. That would mean Prime rate of 5.5-6%. But even these highly capable economists at the Fed are merely taking educated guesses. Their hawkish tone toward interest rates is in response to the high inflation that we are all seeing. I don’t have to convince you that inflation is out of control. Today we actually saw another 40-year high in the Consumer Price Index at 8.5% with no meaningful signs of slowing. With China dealing with lockdowns in response to Covid and Russia’s invasion of Ukraine, the supply chain continues to suffer – which is inflationary in nature. All this puts the Fed on a tightrope of trying to slow the economy and thus slow inflation, without pushing us into a recession. Historically, this has been difficult at best, and nearly impossible at worst. Many times in the past the Fed over corrects, pushing us into either a mild or in some cases severe recession as they raise interest rates. But the Fed doesn’t just fight inflation through short-term interest rates, they also affect long-term interest rates through a process called quantitative tightening. This is a process of the Fed slowing and in some cases ceasing the bond buying they have been doing in the open market. Bond buying helps keep interest rates low – so the Fed not buying bonds has already caused long-term rates to move upward. That’s part of the reason that rates have moved as high as they have in a short amount of time. What about interest rates on your deposit accounts? How will they respond to these interest rate increase? They will go up – but it will be slow because banks are awash with cash. Remember that the money supply is up 40% compared to before the pandemic. CD rates will rise, but perhaps not as quickly as loan rates have. To sum it up, interest rates are volatile right now and no one knows where they are going to end up. So what should you do in an environment like this where a lot of change is happening in a short period of time?
Verify mortgage interest rate assumptions regularly. Believe it or not, mortgage rates have moved as much as a half percent in a single day, so make sure you are making your home buying decisions based on the reality of interest rates rather than what you hope interest rates will be. If you are in the process of buying a home and haven’t pulled the trigger, check in on rates regularly, because it may affect the price house that you pursue.
Go ahead and lock your mortgage rate if you are able. If you are still in the information gathering phase on home buying, your rate is likely not locked. Even if you are pre-qualified, until you have a subject property your interest rate is often not locked. Ask your bank how you can lock your rate to remove some of your uncertainty while you look.
Don’t let a sense of urgency make you panic. When we panic, we often make bad decisions. Although there is a sense of urgency for homebuyers, don’t stress out trying to control what you cannot control. Focus on the what you can control in the home buying process- the decisions that you can affect.
Whenever you are estimating costs, add 20-50% depending on the project. Whether you are building a new house or just buying a new kitchen appliance – expect it to cost more than it ever has. Don’t get caught having to reach for the credit card because you didn’t estimate correctly on the front end. And don’t beat yourself up over timing. You might be saying in your head that you should have built that house or bought that piece of equipment a couple of years ago. That may be true, but you can’t change the past. So ask yourself whether you can afford whatever you are buying today. Focus on the known before speculating on the unknown. We just don’t know what tomorrow will bring.
At MBC/Foundation Bank we love helping homeowners make decisions. We like to say that we are more than a bank – we’re a financial solutions provider. If you are looking for a partner that can help you make better financial decisions on your next home purchase, your next construction project, or your next small business investment, start a conversation with us by visiting exploring our website or contacting your local branch. We hope you have found this episode helpful, and if you have, we hope you will share it with your friends and family and on social media. Until next time, God bless you.
-President Chad P. Wilson, CFP
Today’s episode of “Money Matters” was written and recorded by President Chad P. Wilson of McKenzie Banking Company / Foundation Bank on April 12, 2022. This episode does not constitute financial advice. Please consult a financial professional to discuss your specific needs. MBC/Foundation Bank is an Equal Housing Lender, Member FDIC.