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Interest rates continuing on their long, strange trip

January 19, 2018
By BOB and GERI QUINN - Homing In , Cape Coral Daily Breeze

As we begin to move a bit further into 2018, the markets will be closely watching the new leadership of Jerome Powell, as he succeeds Janet Yellen as the chairman of the Federal Reserve in February. It is widely expected that Powell will maintain the interest rate and monetary policies of Yellen, by continuing on the slow path of steady incremental increases to short-term interest rates. The long talked about transition to a rising interest rate policy finally became a reality in 2017, albeit in quarter-point baby steps amounting to only three increases in the ultra-short-term Federal Funds Rate, which were spread out over the entire year. The Fed has indicated they will likely continue with three more rate increases in 2018, although some market analysts think they could do as many as five rate increases this year.

Over the past several years, and especially a year ago, many real estate pundits were warning both homebuyers and sellers that they better make their real estate moves sooner, rather than later, before mortgage rates started moving higher because the Yellen-led Federal Reserve was likely to raise interest rates at least three times in 2017. As we pointed out in our column back on April 7 of last year, getting back to anything remotely resembling a normalized interest rate environment, if that is where we are headed, is likely to be an interesting process with some unexpected twists and turns. One of the several likely potential scenarios we outlined in that column has played out so far, as we saw longer-term interest rates flatten out as the Fed nudged short-term interest rates up off of the record low rates.

To cite an example of this, according to mortgage buyer Freddie Mac, last week the average rate on 30-year fixed-rate mortgages increased a fraction to 3.99 percent. This matched the 5-month high in average mortgage rates, set two weeks prior to this, but it is still lower than the 30-year rate from a year ago, which was at 4.12 percent. So as the Fed has raised short-term interest rates, longer-term rates on mortgages have remained in a fairly tight range that has been mostly flat to lower, which turned out to be a different outcome than the vast majority of expert predictions calling for higher mortgage rates last year.

Getting it right from this point forward will probably prove a lot more difficult. As someone who has spent the better part of the last 30 years closely following the interest rate markets and their impact on the economy, I find it interesting to watch the predictions for where mortgage rates are heading in 2018, and beyond. The logical prediction would seem to be towards an environment of higher mortgage rates, but markets are not always logical, and accurately predicting the timing, number and amount of the rate changes is the most difficult, and often the most costly aspect of making market predictions.

So where are mortgage rates headed and what impact will it have on the housing market? Getting that prediction right from this point forward, especially the timing of it, will probably prove a lot more difficult going forward because we are quickly approaching a major "fingers crossed" moment. Back during the mortgage-backed financial crisis in the housing market, the Fed implemented a rescue plan that involved slashing interest rates, known as Z.I.R.P., which stands for a "zero interest rate policy." They also embarked on a program called Quantitative Easing, or QE, which involved "printing" electronic money to pump into the financial system through a massive buying spree of debt. This debt was transferred from the private sector balance sheet of large financial institutions to the public sector balance sheet of the Federal Reserve, as a part of the bailouts of the too-big-to-fail companies.

New Fed Chairman Powell will be tasked with "threading the needle," as he continues the recently begun Fed program of trying to gradually unwind, or sell-off this debt without tipping the balance of the bond market. Any mistakes in judgement or timing by the Fed could trigger a sell-off in the Treasury bond market resulting in a sudden, cataclysmic spike in interest rates, which would most likely send a rapid chill through our economy and the housing market. This would also result in dramatically higher interest repayment costs on the debt of the federal and state governments.

Since the same types of scenarios exist in Europe and throughout much of the world, this is a global debt problem, so the stakes are really high for the Fed to get this right. This leads us to believe they will be doing everything they can to keep long-term interest rates and mortgage interest rates in check, so they do not spiral higher in an out of control manner.

So, we would tend to expect mortgage rates to stay reasonably well contained in 2018, with maybe a gradual increase over time, unless the Fed makes a mistake, in which case it will be an all bets are off type of situation. Either way, it is likely to remain a long, strange trip back to a somewhat more normal interest rate environment, if such a thing still exists.

If things do go wrong with interest rates, and they suddenly spike higher, it will not be a good thing for anyone trying to sell a home, as prices will be negatively impacted and it will become more difficult for buyers to obtain a mortgage. Again, this is something that the Fed has to be keenly aware of and we would think it would be something they would try to prevent from happening at all costs.

(The information for this article was obtained from a variety of outside sources and personal knowledge, believed to be reliable, and compiled by Bob and Geri Quinn. This information could be updated and revised periodically, and it is subject to change without notice. The Quinns are a husband and wife real estate team with the RE/MAX Realty Team office in Cape Coral. They have lived in Cape Coral for over 38 years. Geri has been a full-time Realtor since 2005, and Bob, who also holds a Certified Financial Planner designation, joined with Geri as a full-time Realtor in 2014. Their real estate practice is mainly focused on Cape Coral residential property and vacant lots.)



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