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June 8th, 2009 11:35 AM by David W. Welch
I have been saying for a while that interest rates have been held artificially low by the Fed. They have been buying up mortgage backed securities to keep the secondary mortgage market liquid. By supporting the back end of the market, mortgage funds have remained more readily available and therefore less expensive. Less expensive money means lower interest rates. They have also lowered the Fed rate basically to zero%. Just a quick lesson, zero is the lowest you make an interest rate. While the Fed rate does not directly impact mortgage rates it does effect yield curves which result in effects on all interest rates.
While all of this is geared to stimulate the economy it also has spurred some increases in real estate purchases. Both of these things can help turn the recession around, but as that happens there is always a fear of inflation just around the corner. Well, that fear is becoming more of a reality as there are more signs that the end is near. The end of the recession that is. Jobs usually turn around several months after things start to improve, because employers don't want to move to quickly. They want to be sure that they really have the sales to support hiring new staff.
I have been speaking with lenders about what is going on right now. The general feeling is that the current spike in rates has more to do with refinancing activity rather than a trend in the rates. The thought is that the rates will probably come back down somewhat through the fall. Keep in mind the Fed is expected to stop the purchase of mortgage backed securities in December. By then the economy should be headed back in the right direction, so expect interest rates to begin a true upward trend by then.
Some of the lowest rates I have seen were 4.875% and today they are quoting 6.325%. To put that in perspective: the principle and interest for a $100,000 loan at 4.875% is $529.21 at 6.325% the payment is $620.60 a $91.40 difference. That is a 15% reduction in purchasing power. In other words, at 6.325% to get a P&I around $529 the loan amount has to be about $85,000.
Orlando Real Estate, David Welch Real Estate Optimist, @RealtyOptimist