Interest Rates Going Up?

Nef Cortez

By Nef Cortez

Housing affordability is greatly affected by the interest rate that one can secure when obtaining their loan. Interest rates go up and down, and are largely influenced by forces that affect all markets: Supply and Demand. Due to the Great Recession of 2008, long term mortgage interest rates have been low for the past decade.  Historically low interest rates have driven the market prices of homes to levels that exceed the high point of the housing market in 2006.

One of the two main factors that Federal Government affects the Supply side of the mortgage equation is by purchasing or selling Treasury bonds or mortgage backed securities (based on previously originated home loans). When the Federal Government buys debt through this mechanism, it will either increase or reduce the supply of money in the open market, thereby affecting the increase or decrease of money available to use as a loan to purchase a home.

The second primary factor that will influence the interest rates is the “Demand” for money. As is occurring right now, a growing and improving economy creates more jobs.  More jobs translate to more employees who can then afford to compete for mortgage money. It also creates increased competition between employees who can vie for improved positions and higher wages.  We are beginning to see that with the continual announcements of 17 year lows in the unemployment rate.

With the current effort by the Federal Reserve to reduce its balance sheet (reduce its debt), it is selling off Treasuries and mortgage backed securities which soaks up some of the available cash in the market. This is in itself an action that is reducing the Supply of money in the open market, and thereby putting upward pressure on interest rates.

The gradual decrease in Supply of money, combined with the growing Demand for money, is exerting upward pressure on interest rates.  It is almost certain that we will see an increase in mortgage interest rates over the next 1-3 years.

This article was written by Nef Cortez, a licensed Real Estate Broker in Diamond Bar Ca, DRE # 00560181 since 1976. He can be reached via e-mail at nefcortez@gmail.com. Please feel free to email any questions regarding real estate.