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Mortgage interest rates and the Federal Reserve

April 5, 2019
By BOB & GERI QUINN - Homing In , Cape Coral Daily Breeze

Interest rates and the Federal Reserve have been in the news a lot lately, and they are both likely to have a continuing impact on the U.S. economy and the housing market throughout 2019. In addition, various global events, such as Brexit, trade sanctions and a slowing European economy, could influence interest rates in the U.S. Treasuries market, and therefore, have the potential to move mortgage interest rates in unexpected ways.

After rising throughout much of last year, the interest rate on a 30-year fixed rate mortgage reached its peak level at nearly 5 percent back in early November 2018. This final leg higher in interest rates followed the September announcement by the Federal Reserve that they were intending to raise their ultra-short-term Federal Funds Rate three more times in 2019. The potential rate hikes this year would have likely continued in small 25 basic point increments, after one such increase back in 2016, and three more baby step increases in 2017, followed by the four rate increases of one-quarter of one percent each in 2018. Based on last September's announcement, the thought of the Fed overdoing it with interest rate hikes this year and potentially stalling out the economy, was likely one of the contributing factors to the intense stock market volatility during the fourth quarter of last year.

In December, the Fed indicated their plans to raise rates two times this year, and then at their meeting in January, they left the Fed Funds Rate unchanged at the current level, which ranges between 2.25 to 2.50 percent. They also said they were moving away from their plan of steadily raising interest rates over the next two years, and that they were shifting to a more patient approach in deciding when to raise rates again. Then on March 20, the Fed surprised Wall Street by signaling there would be no interest rate hikes for the rest of this year, leaving some economic and market pundits to now suggest that the next move to made by the Jerome Powell-led Fed in 2019, would be an interest rate cut instead of a rate increase.

Are you confused yet? This back and forth movement with interest rates is something we discussed in a column titled, "Interest Rates Continuing On Their Long Strange Trip," in early 2018, just before Jerome Powell was set to take over from Janet Yellen as chairman of the Federal Reserve in February of last year. At the time, we pointed out that, "the logical prediction would seem to be towards an environment of higher mortgage interest rates, but markets are not always logical." In that column, we also referenced our column from April 7, 2017, when we commented that, "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."

Remember, as we have discussed on multiple occasions, the Fed is still trying to emerge from a lengthy period of time following the mortgage-backed financial debacle, which led to the financial crisis and the now infamous housing market crash. Part of the Fed's recovery strategy was to artificially manipulate interest rates with their Zero Interest Rate Policy, known as "ZIRP," along with "buying back" huge amounts of bad debt by printing massive amounts of electronic money through their multiple Quantitative Easing programs, which was also known as "QE."

So the main takeaway from all of this is, don't be confused by the back-and-forth swings with mortgage interest rates, as the Fed tries to stay a step or two ahead of itself in the clean up from the aftermath of another one of their largely self-induced bubbles.

To help illustrate this for you, let's take a quick look back at mortgage interest rates so you can see what we mean when we say the return to more normalized interest rates is likely to be an interesting process with some unexpected twists and turns. As we mentioned in the second paragraph above, mortgage interest rates topped out at just under 5 percent in early November of last year, and according to the well-known mortgage buyer Freddie Mac, the average 30-year fixed rate mortgage has declined by about 18 percent since then, to 4.06 percent at the end of last week. These mortgage rates are based on an average of national rates and they do not include any additional fees that may be charged by lenders.

In addition, the decline in the interest rates on the 30-year fixed rate mortgage last week was the largest weekly decline in mortgage rates since 2008, and it brought mortgage rates down to the lowest level in more than a year. Looking back to sometime around late January of 2018, the average rate on a 30-year fixed rate mortgage was at 3.99 percent, which matched the 5-month high in average mortgage rates at that time. And a year earlier, in January 2017, the average rate on a 30-year fixed rate mortgage was at 4.12 percent, so as of the end of last week, mortgage rates had actually moved below this point.

So what can we expect next with interest rates? Some experts have been citing a recent inversion of the yield curve as a warning sign that an economic slowdown, or a possible recession, may be looming on the horizon. This would likely lead to the Fed cutting interest rates, but even the recently inverted yield curve was abnormal by more traditional economic standards. When this abnormality is combined with the fact that oil and copper prices have both been moving higher, it is usually a sign of strong future economic conditions. This potential strength in the economy could lead to higher interest rates, so we seem to have a lot of moving parts and economic contradictions, which leads us to say to expect more of the same, long strange trip towards something that will eventually be viewed as a normal interest rate environment.

(The information for this article was obtained from a variety of outside sources and personal knowledge, and it was compiled by Bob and Geri Quinn. This information is believed to be reliable, however, it 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 39 years. Geri has been a full-time Realtor since 2005, and Bob 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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