Are you ready for mortgage rate increases beginning in October 2017?

Federal Reserve BldgWhile we have all been watching hurricanes, fires, earthquakes, North Korea threats, and so much more, the Feds rather quietly held their usual monthly meeting just about a week ago on September 20, 2017 where they unanimously decided it’s time for them to begin to unwind Quantitative Easing (QE).

Most recently we’ve grown accustomed to news that the Feds met and little changed. The benchmarks the Feds were looking for to signal economic health were not happening. But anyone watching the Feds knew that the news was bound to change soon; and it seems that soon means now.

Per the news conference held after the meeting, the FOMC (Federal Open Market Committee) chaired by Janet Yellen announced that they finally feel that the US economy is now healthy enough to begin to unravel QE  and let the market find its own way.

As a reminder, QE (quantitative easing was implemented just after the bank bailouts and housing market crash about 10 years ago in order to stabilize the economy as much as possible. The over night lending rate for banks and large financial institutions was dropped to zero while the Fed began buying up federal and mortgage bonds in astronomical numbers. They began unwinding that policy at the end of 2015 by gradually raising overnight lending rates which now stands at 1.25%.

The Fed currently holds $4.5 trillion in these security instruments. This buy and hold strategy has artificially held lending rates of all types, including mortgage rates at almost unprecedented low levels for the last 10 years.

Last Wednesday the Fed announced that the over the counter lending rate for banks will remain at 1.25% but QE has come to an end. They will begin selling off bonds beginning October 1, 2017 and will continue to sell monthly until the portfolio is gone,or until they decide that their portfolio is an appropriate size and the markets have stabilized. 

The starting rate of the sell off will begin somewhat slowly; next month they will sell $4 billion in mortgage backed securities and $6 billion in Treasury bonds. This number will increase monthly until the sell rates reach $20 billion monthly in mortgage securities and $30 billion monthly in Treasuries. It is expected that these levels will be reached in about a year. 

Once those bonds start hitting the free markets, it is forecast that all lending rates will increase incrementally, including mortgage rates, until the bonds are gone. As we have seen in the past, when banks feel they have any excuse at all to raise lending rates, they do so. Typically they test the waters with a bigger increase than the market will bear, so they pull that increase back slightly. But with billions of dollars worth of bonds hitting the free markets every month going forward for at least the next year, it’s impossible to predict just how quickly lending rates of all types will rise.

The Fed will monitor the rate of sales closely to ensure that we don’t see car loans, student loans, personal loans, credit card rates and mortgage rates rise too quickly, but rise they all will. Even the Feds expect that. 

IF you are thinking about selling or buying a home, this might be time to get going. These rate increases may seem small, but could definitely affect how much buyers are qualified to spend for a home purchase, especially those who are looking at homes priced at their current pre-approval limits.

 

 

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