I was asked to answer this question for an article in a local realtor’s monthly newsletter. Here was my response:
Here’s the question of the day: “Where are interest rates headed?”. Well first let’s take a look at what happened to 30 Year Fixed Interest Rates over the past four months. According to Freddie Mac, the average 30 Year Fixed Interest Rate at the beginning of November 2016 was right around 3.5%. Today, that same scenario has an interest rate of roughly 4.21%. That is almost a three quarters of a point increase in the past four months.
Now, do I think this interest rate increase is going to continue and at this pace? Well, we must first look at what is also happening at the same time in our economy. Over the past four months the stock market has witnessed an increase of almost 3,000 points. If investors are making big investments in the stock market that most likely means they are pulling money from the bond market, hence we are seeing a rise in interest rates. If we continue to see this optimism on the stock market side and money continues to flow into stocks and out of bonds, we should continue to see a gradual uptick in interest rates.
There is one more item we have to consider in regards to mortgage interest rates increasing. As most of us remember, the housing bubble burst around 2007 and the appetite for US and Foreign Investors purchasing our Mortgage Backed Securities dried up. To help stabilize the real estate market and keep interest rates low, our government started purchasing large quantities of mortgage backed securities and this still goes on today, although at a much lower level. The Federal Reserves is starting to signal that they may be ending this program at some point in the near future. This should have a negative effect on interest rates going forward as the bond market will be back to relying on US and foreign investors to buy up all of the mortgage backed securities coming onto the market each month. If the appetite is healthy, that will benefit interest rates and if not, we could continue to see the rise in rates at a faster pace.
My prediction is that we will continue to see historically low interest rates throughout this year but that will be in the four to five percent range and that we have most likely seen the end of the mid three percent interest rates.