Mortgage Rate Outlook for 2018
While media pundits prognosticate on a regular basis as to whether or not the Federal Reserve will raise interest rates further this year, there is a negative undercurrent that we will get to later in this article that no one wants to discuss. Keeping rates artificially low might have been a good idea for a short time after the financial crisis in 2008 – 2009. But, it has created a situation where people who depend on earning interest from certificates of deposit and other fixed income instruments have been taking a beating for many years. On the other hand, it has kept mortgage rates at or near historical lows which is good for those buyers who would be priced out of the market if interest rates were to rise substantially.
The reasons that mortgage rates will not rise very much in the coming year are a bit complicated and require some background and analysis. The biggest beneficiary of low interest rates has actually been the U.S government itself. The reason for this is that when the Federal Reserve does begin to raise rates, everyone will experience a higher cost to borrow money and that includes Uncle Sam. With the national debt in the range of $20 trillion, a 2% rise in interest rates would result in a budget busting additional $400 billion per year in interest payments on the debt.
So, while the Federal Reserve would like to see a return to market driven interest rates, the reality is that any significant increase in interest rates would put extraordinary pressure on the federal budget and increase the deficit even further. Concomitant with this is the falsification of the consumer price index which helps to suppress cost-of-living increases for recipients of Social Security. Anyone who has been paying for their own health insurance, buying food at the store or making discretionary purchases has seen prices rising for a wide variety of goods and services, even though the CPI in official terms has barely budged in the past few years.
Imagine for a moment that interest rates were to rise by 2% which has the net effect of raising the cost of borrowing money for individuals, businesses and the government. Most businesses cannot absorb the additional cost of borrowing so they have to raise prices which ultimately drives up the CPI. The double whammy of higher borrowing costs and a higher consumer price index would create so much financial pressure on the federal budget that it would be unsustainable and massive spending cuts somewhere in the budget would be necessary.
Keeping interest rates artificially low for approximately 9 years has helped to push up valuations in the stock market because for the vast majority of investors there is no alternative to achieving better returns than through equities. If we step back and look at the big picture, the Fed will most likely make slow incremental moves upward. In our opinion, the rate for a 30 year fixed mortgage for a primary residence will likely not exceed 5% any time in the coming year and may well remain closer to 4% depending on how the economy fares.
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Weekly Real Estate Update
Statistics gathered from the Incline Village MLS on 11/5/17
Houses Condos PUDs
For Sale 118 51 27
Under $1 million 32 38 13
Median Price For Sale $1,650,000 $545,000 $1,100,000
YTD Sales 2017 145 174 48
YTD Sales 2016 141 178 51
New Listings 7
In Escrow 6
Closed Escrow 16
Range in Escrow $379,000 - $1,450,000
These statistics are based on information from the Incline Village Board of REALTORS® or its Multiple Listing Service as of November 5, 2017