Mortgage rates on the rise?

Because the real estate market is smoking hot in many parts of the country, buyers are finding the cost of owning a home is rising sometimes dramatically in short periods of time.  But there is a less visible sign that the cost of home ownership is increasing, and that is the cost of money, mortgage interest rates to be exact.  Today, I received my weekly interest rate update from one of the lenders with whom I work.  I have been tracking interest rates weekly since May 2008 and what that chart shows is dramatic.  While the official numbers may show something slightly different, my tracking shows that mortgage rates for 30 year fixed rate mortgages bottomed out at 3.375% in about July 2012.  They bounced up and down from that point but never got below that floor.  The last time the rate was at 3.375% was December 2012.  Today the rate in my weekly update was 4.125%, an increase of 0.75% in about a 6 month period.

It is commonly believed among economists and other experts that the reason rates have remained low for as long as they have is because the Federal Reserve Bank has been buying up treasury bonds which keeps the price of bonds high and the yield (the interest rate) low.  In effect the US government has been lending money to itself, a practice that many people refer to as printing money.  The problem is that this eventually will cause inflation to raise its ugly head.  I mention this because the number one factor affecting the rise and fall of interest rates is inflation.  Low inflation equals low interest rates.  Are we beginning to see signs of inflation in the US economy?  Perhaps.  Time will tell.

For the homebuyer this is important because an increase in interest rates definitely affects the affordability of a home.  A 1% increase in the interest rate is equal to a 10% cost in the selling price of a home.  So with home prices and mortgage rates trending up homebuyers are finding themselves hit with a double whammy, increasing prices and increasing cost of borrowing.  Still a bit of perspective is needed here.  Even at 4.125% mortgage rates are a bargain.  Historically, mortgage rates have hovered around 8 or 9% and have soared as high as 18 or 19%.  The later was during times of high inflation in the mid 1970s.  Are we headed there again?  It’s difficult to say for sure.  As they say, ask a dozen economists and you will get a dozen different answers.  I, for one, as a non-economist, believe that they are headed up.  For now I believe that it is sufficient to say that rates are still good and home buyers should take advantage of them while they can.