The only thing we have to fear, is fear itself……inflationary fear

Two observations I have seen since I became a mortgage banker on October 1^st 1991:  1) the most commonly asked question in the mortgage business is, “What is your interest rate?” and 2) the biggest change I have seen in the last twenty three years in the mortgage business is rates move on emotion and speculation, before economic data is released and studied.  How are these two observations linked together?

Interest rates have major impact on monthly payment.  Homeowners want to know what price range they should be shopping in and what mortgage payment they can afford.  Rates dictate affordability in the buyer’s mind.  Rates are constantly advertised and used as a primary decision maker for purchasing or refinancing.  Mortgage companies go to great lengths to advertise interest rates.  Governments attempt to stimulate or slow the economy thru regulating rates.  In short, the perception is interest rates rule the psyche of the consumer.

So it is no surprise that mortgage bankers are asked to predict the future of rates every time we answer the phone.   Based on this historical chart it is easy to predict rates will go up.  The only question is “when?”  The answer is simple.  Rates will go up when speculation and emotion drive them up.  When I entered the mortgage business economic data would come out first, suggesting how strong the economy was (or was not) and rates would move accordingly, providing a true reflection of the state of our economy.  Today, perhaps much like the stock market, the market prices interest rates in anticipation of what economic data will be released and speculative interpretation of how that signals the state of our economy. 

A recent move in interest rates serves as a great example of this observation.  Fifty three weeks ago, interest rates for a 30 year fix were resting at close to a 42 year low.  Then one Tuesday, the Federal Reserve hinted that the Federal Government would begin tapering off on their monthly purchase of Mortgage Backed Securities (MBS).  In the span of 4 hours, rates rocketed to .75% in rate, rates moved from 3.5% range to 4.25% range on a 30 year fixed.  “When is turns, it burns” and ouch…that day left a scorching burn!  Keep in mind the cause of this rocket- like rise was a hint……a hint the government was tapering.  

 

Reprodeced with the permission of Mortgage-X.com

 None of us need to be a recognized, published economist to understand rates are low, really low and affordability is up.   Historical data suggest we are near the basement of the interest rate cycle.  Rates will go up.  The question is when will rates go up?  Many “experts” believe rates will stay low for a while.  The government has a huge debt service.  Low interest rates are in the government’s best interest.  The economy is getting stronger.  Jobs are coming back from overseas to America.  Some prognosticators believe the DOW is going to 18,000 +.    Today, one year later, many experts see tapering as a positive sign the economy can stand without the aid of the government.  What a difference a year makes!  Consumer confidence is going up and unemployment is going down.  We are in an election year (just ask Eric Cantor).  All these factors suggest rates should stay steady for a while.  But as Lee Corso says every Saturday on ESPN in the fall, “Not so fast my friend!”  Nothing, and I mean nothing makes rates race up like inflationary fears.  Beware that the speculation of inflation is growing like a tidal wave at sea.  Be alert and listen for the anticipation of inflation.  The government keeps a watchful eye on inflation.  Short of a national tragedy, nothing will make for a dramatic increase in rates go up in a recovering economy like inflationary fears.  

 

So do not fear “inflationary fears”.  Anticipate it.  Lock in on rates at your first opportunity.  Do not find yourself in the same shocking position as those 53 weeks ago who returned from lunch to learn rates had jumped from 3.5% range to 4.25% range one afternoon in the summer.  There is no warning of rates going up when speculation and emotion gain momentum…..especially when it relates to inflation.  Remember gasoline prices going from $1.50 to $3.00/ gallon overnight?  Bingo!