Why Very Low Interest Rates May Stick Around

The Federal Reserve will most likely raise interest rates this week for the first time in nearly a decade. To understand what it means — and doesn’t mean — consider a previous year in which interest rates were on the rise.

In 1920, borrowing costs soared to their highest levels since the end of the Civil War. Some people were terrified of what it was doing to the economy. Higher rates “would practically legalize usury,” a real estate trade group warned. A Democratic senator complained that “manufacturers, merchants and business men are entitled to stability.” The Federal Reserve was “confronted with conditions more or less abnormal,” acknowledged a governor of the central bank, William P.G. Harding.

The interest rate that caused this angst? A mere 5.4 percent on the 10-year United States Treasury bond — lower than the rates during the entirety of the 1980s and most of the 1990s.

What does this have to do with the Fed’s likely move this week? For years, financial commentators have been predicting an imminent rise in rates. After all, goes the theory, the Fed has been engaged in extraordinary interventions to artificially depress the cost of borrowing money. Surely those rates will snap back to their pre-2008 levels, if not rise higher. If that happens, get ready for double-digit mortgage rates and substantially higher cost to maintain the government debt.

But if you look at the longer arc of history, a much different possibility emerges. Investors have often talked about the global economy since the crisis as reflecting a “new normal” of slow growth and low inflation. But, just maybe, we’ve really returned to the Old Normal.

Very low rates have often persisted for decades upon decades, pretty much whenever inflation is quiescent, as it is now. The interest rate on a 10-year Treasury bond was below 4 percent every year from 1876 to 1919, then again from 1924 to 1958. The record is even clearer in Britain, where long-term rates were under 4 percent for nearly a century straight, from 1820 until the onset of World War I.

The real aberration looks like the 7.3 percent average experienced in the United States from 1970 to 2007.

“We’re returning to normal, and it’s just taken time for people to realize that,” said Byron Taylor, chief economist of Global Financial Data, which scours old records to calculate historical financial data, including that cited here. “I think interest rates are going to stay low for several decades.”

If so, it would mean that many predictions through the last several years of ultralow interest rates have misread the situation. “Once the economy gets going, then interest rates are going to take a big leap,” said George Soros, the billionaire hedge fund manager, in a 2013 CNBC interview.

“We can expect rapidly rising prices and much, much higher interest rates over the next four or five years,” wrote the economist Arthur B. Laffer in The Wall Street Journal in 2009. In 2014, all 67 economists surveyed by Bloomberg predicted higher rates six months hence; they instead fell sharply.

Of course, rates could go up. But what that analysis may have missed is that interest rates historically are most closely tied to inflation. How much investors demand as compensation for loaning their money is shaped in no small part by how much they think that money will be worth when they get it back. And the pressures that normally generate inflation seem to have disappeared in recent years.

The Fed and its counterparts overseas at the European Central Bank and Bank of Japan have spent the last few years applying every policy they can think of to get inflation to rise up to their 2 percent target, with limited success. In a world awash in supply of workers, oil and more, financial markets show little sign that investors think that will change anytime soon. Current Treasury bond prices predict annual inflation in the United States of only 1.7 percent a year over the next three decades.

Consumer confidence and home sales surge, hinting at a big 2015 for housing

By Schuyler Velasco

New home sales surged 11.6 percent last month to a 481,000 annualized pace, according to data released Tuesday by the Commerce Department. That was well above economists’ expectations of a 450,000 December pace and a bounce back from November, which was revised downward to a 431,000 pace.

It was the best December for the new home market in nearly six years.

Home prices, too, are going up across the US, albeit more slowly than they were a year ago. In a report also released Tuesday, prices on S&P/Case Shiller’s national index inched up 0.8 percent in November and 4.7 percent year-over-year. But slower price increases, analysts say, should not be interpreted as a sign of lessening demand. 

“This number paints a misleading picture of the housing market,” IHS Global Insight economists Patrick Newport and Stephanie Karol write in an e-mailed analysis. “All in all, evidence suggests that demand is strong nationwide: both the S&P/Case-Shiller national index and the FHFA measure [another leading index] showed yearly home price growth accelerating in November. By these more comprehensive measures, price growth is stabilizing in the 4-5 percent range: a healthy sign.”

Recent sales numbers, too, seem to bear out that logic. New home sales make up a relatively small portion of the overall market, but the much-larger pre-owned market also perked up in December, rising 2.4 percent on the month.

Both gains capped off a relatively lackluster 2014 (new home sales improved just 1.2 percent over 2013), and gave economists more evidence that 2015 could be a big improvement for the housing market. Both builders and consumers are growing more and more confident about the economy overall; in data also released Tuesday, The Conference Board’s index of US consumer confidence surged to 102.9 in January, blowing past expectations of a 95.5 reading. Monthly gas prices at or below $2.00 per gallon in most of the country, a strong dollar, a healthy job market, a pickup in wages (finally), and new rules easing up on FHA mortgage insurance premiums that could benefit first-time buyers all portend a much more buyer-friendly market in the coming year.

Earlier this month, measures of builder optimism and housing starts also came in strong, suggesting that the construction industry is readying for a pickup in housing demand in the coming months.

Economists caution that one strong month is hardly a trend, especially in the case of a small, sometimes-volatile measure like new home sales. But December’s data is reason for cautious optimism.

“As more first-time buyers are empowered to purchase an existing home, the sellers of those homes will be in a better position to put down a deposit on a new one,” Newport and Karol write. “Since we expect wage growth to support additional household formation in 2015, these forces will help to clear some important obstacles which have restrained demand in recent years.”

Lock in or Float?

What should a borrower do?

John Stearns, a senior mortgage banker with American Fidelity Mortgage near Milwaukee, expects rates to stay low through the fall and winter as a way for lenders to entice people to buy during the traditionally slow time of year. Already, demand is falling off.

The volume of loan applications dropped by 7.2 percent this week from the prior week, to the lowest level in almost 14 years, according to the Mortgage Bankers Association.

Stearns’ advice is to lock any mortgage rate if you plan on closing in a week or two. “Anything longer than that, float,” he says. “I don’t see rates going up anytime soon.”

Pava Leyrer, manager of training and implementation for Northern Mortgage Services in Grandville, Michigan, and Norris both recommend a rate lock to keep the guessing and stress out of an already stressful situation, especially for those borrowers who have a payment that is at the upper end of their budget. One small move could mean a larger monthly payment or could require more cash at the table to close.

“If the market takes a dramatic change lower, most lenders will work with you if you’re in a lock,” says Leyrer. “You’re hedged each way. So move on and get your loan done.”

Four reasons to buy a home now

Thinking of buying a home? Keep reading to find out why you should take action sooner rather than later.

Yahoo Homes

By Danielle Blundell                                 August 6, 2014 8:29 PM

Four reasons to buy a home nowFour reasons to buy a home now

If you’re thinking about purchasing a home, sooner might be better than later when it comes to favorable conditions for buyers.

Buying a home is a major financial decision that you shouldn’t rush into. But that doesn’t mean you should take your sweet time either. The real estate market is volatile, and truth be told, this year might be your last chance to affordably buy a home for awhile.

“If you qualify for a mortgage and choose not to buy now, you will be kicking yourself in 12 months,” says Anthony VanDyke, president of ALV Mortgage in Utah.

Thanks to a dearth of inventory, home prices are projected to increase by 6.3 percent nationwide from April 2014 to April 2015, according to a recent study by Corelogic, a leading global property information, analytics, and data-enabled services provider.

Just how much could that increase cost you? More than you might think.

“On a $300,000 house today, the same house will cost you $318,000 in one year,” says Vandyke.

The difference isn’t mere pocket change. So if you’re in the market to buy a home, read on for more reasons why this year could be a prospective homeowner’s last chance to buy an affordable home.

Reason to Buy Now #1: Low for-sale inventory means homes will become more expensive

A low inventory of homes for sale keeps house prices up, according to California-based mortgage banker, Michael Regan, of the Regan Team.

“It’s simple supply and demand,” says Regan. “The less you have of something, the more expensive it will become.”

Just how did we get into this increasingly low-supply, high-price environment? According to Regan, there are a few causes.

“With the limited housing inventory in many markets, and with last year’s home price increases, many people couldn’t afford to buy a home and rented instead,” he says. “Because of the Great Recession, the building of new homes and rental units was almost nonexistent for years and didn’t keep up with population growth.”

With a shortage of housing and rental units available, Regan says housing prices and rents have increased, leading to affordability issues. The good news is that this supply and demand issue will solve itself once more housing units are built to accommodate the population growth and young families looking for homes, says Regan. But the bad news is that it could take a while, and prices will climb until then. So now might be a good time to buy, before prices peak, he explains.

Reason to Buy Now #2: The Fed plans to taper off bond-buying program in October

With the economy improving and the unemployment rate dropping, the Federal Reserve tentatively plans to end their bond-buying program in October. The end of the program, which was aimed to keep interest rates low, is expected to result in higher interest rates, and any increase in interest rates could create even less favorable conditions for buyers, says Van Dyke.

According to the MBA Mortgage Finance Forecast, interest rates on 30-year fixed-rate mortgages are projected to jump half a percentage point in early 2015 from the year before.

On a 30-year conventional mortgage of $300,000, an increase from 4.4 to 4.9 percent means paying an extra $90 each month or more than $30,000 in interest over the life of the loan. So that half point difference can translate into a hefty chunk of cash for any home buyer.

“Rising rates can have just as big an impact on affordability as does rising prices due to low housing inventory,” says Ellen Davis, a Maryland-based senior mortgage loan originator with Corridor Mortgage Group.

When mortgage rates increase, Davis says borrowers experience greater difficulty qualifying for a home loan.

“Higher interest rates increase a borrower’s overall debt to income ratio, and depending on their current situation, they may end up no longer qualifying based on underwriting guidelines. Even if they do qualify, they may not be comfortable with the higher monthly debt payment and may choose to reduce the amount of home they are willing to purchase or put off the purchase indefinitely,” says Davis.

So what’s the take home here?

“While you’ve missed the bottom of the market with home prices, interest rates are still very low,” according to Regan. Don’t risk rates going up, he says, which can ultimately cost you big on your home’s price tag.

Reason to Buy Now #3: The current economy’s flat wages threaten to make homes less affordable

When was the last time you heard of companies giving out big bonuses and substantial salary raises? Save a few high-growth industries, flat wages have been the rule, not the exception. If home prices continue to increase, housing could in theory become less affordable if your take-home pay doesn’t keep up with its growth.

“History has shown us that there is always the chance that home prices are pushed out of reach when wages are flat,” says Davis. “Then at some point, some sort of correction in wages or housing occurs, and the correlation between the two sectors becomes more sustainable.”

The question then becomes, when will this tipping point occur, and can you afford to wait?

According to Davis, homes will be more affordable once all areas of the market – stocks, bonds, home prices, wages, government spending and debt, etc. – are working together to create jobs. And better employment figures translate into more income, leading to wealth, economic growth, and ultimately consumer confidence, which in large part helps drive home purchases, she explains.

Sounds ideal, right? Well, don’t hold your breath. It’s impossible to predict when this synergy will take place, so now is as good a time as any to buy a home you can comfortably afford, says Davis.

Reason to Buy Now #4: Beat other home buyers to the punch before competition heats up

Maybe you’ve been renting and managed to save up a nice nest egg. Or maybe you’ve just outgrown your current space. Well, you might want to take the plunge and buy a home once you’ve found something that you can afford.

Why now? Because the housing market is about to get even more competitive. According to Davis, the pent-up demand of younger professionals, who moved back in with their parents during the recession, is about to explode. And as these young people move out and form new households of their own, they will drive up housing demand, she explains.

This eager subset of buyers will create some steep competition for homes, especially if they have been saving up to make larger down payments or high ticket offers, says Davis.

“If the current homes on the market have more potential buyers, bidding wars develop, and the purchase prices are driven up,” says Davis. While the competition helps the overall home values in the area, it also inflates prices to the point where homes are no longer affordable for a large percentage of potential home buyers, she explains.

And it’s only going to get worse as more and more young professionals feel ready to buy, so it’s a smart move to buy now and avoid the potential price gouging altogether. Once you’re officially a homeowner, you can welcome rising prices, because your home’s value will shoot up, according to Davis. “This is good for the individual homeowner as well as for the broader economy,” she says.

Mortgage Interest Rates In Favor of Buyers at Bank of America, Wells Fargo, and SunTrust

Bank of America agreed to  a settlement worth $650 million on Tuesday with the American International Group for resolving the claims of residential mortgage-backed securities. All these legal costs reduced the bank’s income from $4 billion (2013) to $2.3 billion in 2014.

Bank of America

The 30 year fixed rate home loan packages are coming out at an interest rate of 4.125% and are backed by an annual percentage rate of 4.281%. The mortgage provider highlights the popular 15 year fixed rate mortgage deals in its loan books at an interest rate of 4.000% and an APR yield of 4.187%. 5 year adjustable rate mortgage home loan packages, are now traded at a starting rate of 3.375% and an annual return of 3.554%.

30 year fixed rate mortgage loans are being advertised at an interest rate of 4.250% and an APR yield of 4.364% today. The relatively shorter, 15 year refinancing fixed rate mortgage options are now up for grabs at a lending price of 4.125% and an APR yield of 4.271% for the initial years of the home loan period. The seekers of variable interest rates can opt for the ideal 5 year refinancing adjustable rate mortgage plans, which are now traded at a starting interest price of 3.375% and are carrying an annual return rate equivalent to 3.619% on the initial amount of the loan secured from the bank.

Wells Fargo

30 year fixed rate mortgage loans are being advertised at a lending rate of 4.375% and are backed by an annual percentage rate of 4.586%. 15 year fixed rate mortgage home loans are traded at an interest price of 3.625% and an APR yield of 3.835% on July 18, 2014.

30 year fixed rate mortgage home loans can be spotted at a lending rate of 4.250% and an APR yield of 4.335% today. The 15 year refinancing fixed rate mortgage plans can now be locked in at an interest rate of 3.500% and an annual percentage rate of 3.647%.


30 year fixed rate mortgage home loan deals are traded at an interest rate of 4.375% and an annual percentage rate of 4.4853%. 15 year fixed rate mortgage packages are traded at an interest rate of 3.300% and an APR yield of 3.5109% today.

The 5 year adjustable rate mortgage home loans are priced at a starting interest rate of 3.200% and an APR yield of 3.0908% to start with. The more flexible, 7 year adjustable rate mortgage home loans can be locked in at an interest rate of 3.750% and an APR yield of 3.3954% this Friday.

Disclaimer: The rates quoted above are basically the average advertised by a particular lending company. No guarantee of taken from the lender’ aspect whether the borrower will qualify for the mortgage rates mentioned in the article. The lenders dole out interest depending upon various facets, some of which may be unique to the borrower. This website does not engage in the sale or promotion of financial products and makes no claims as to the accuracy of the quotation of interest rates.