Clients really do ask a lot from their Realtors. You take on the role as a tour guide, magician, conversationalist, and sometimes clairvoyant regarding where home prices and mortgage rates are heading. Any good Realtor knows that while home prices are all about location, interest rates are a little more complicated, making forecasting rates a challenge.
Current Rate Thinking
First, let’s hear from the experts. According to the Freddie Mac August 2014 Market Outlook, 30-year fixed mortgage rates, which have been either flat or drifting upward for the last few quarters, will continue to move up slowly. They see these rates at about 5% by the third quarter of 2015. Bottom line is that there will be no big interest rate change for a while, which is good.
Your Own Crystal Ball
A Realtor’s first question is usually the client’s price range. Well, that is going to depend in a big way on the interest rate. Most buyers want to purchase as much as they can afford, and mortgage rate changes impact monthly payments. We might know the rate today, but here are 3 things that will impact future rate changes.
Inflation occurs when prices go up over time. A brand new 1967 Ford Mustang sold for just under $3,000. The same car today is $22,500. One way to think of this is that it takes more dollars to buy the same thing. When inflation goes up, the value of the income from existing mortgage goes down, so they want to increase rates on the next group of loans. In short, low inflation tends to keep rates flat; high inflation pushes rates higher.
2. Economic Growth
In a growing economy, there are lots of jobs, people are buying things, and life is good. This is also when people consider buying that first home or upgrading to a bigger place. It is no surprise that in good times, lots of people are seeking mortgages.
When anything is in high demand, its price goes up, including mortgages. The “price” of the mortgage is the rate, so if you see good times ahead, look for rising mortgage rates. Of course, the reverse is also true, meaning that you could see interest rate bargains in a slowing economy.
3. Monetary Policy
Ouch! This is the wonky one. The Federal Reserve, usually called the Fed, influences interest rates in a couple ways. They set the interest banks pay when they borrow and also do something called adjusting the money supply.
Since the Fed actually prints our money, they get to decide how much to put in circulation. This “adjusts” the “money supply.” An increase in the money supply pushes interest rates down, and a decrease in the money supply causes rates to rise. These changes are usually announced through the news outlets, so keep your eyes open.
The Bottom Line
Let’s go back to where we started. Realtors play many roles. Perhaps the most important is that of advisor. While you have to be careful not to cross that “professional advice” line, it is always comforting to a client to hear the Realtor speak knowledgeably about important things, like where mortgage rates are headed.