Will Americans Adjust?
You can’t read or watch the news and not view a story about some type of addiction in America — whether it is common substances such as caffeine, legal prescription drugs such as pain killers, or illicit drugs such as heroin. But today, we ask a question about addictions and our economy. Are we hooked on low interest rates? Perhaps we are using too strong a word to describe the situation, but it seems like we have gotten pretty used to historically low rates during our economy recovery.
Why do we think that we are getting too used to low rates? For one, every time there is talk of the Federal Reserve Board raising rates from these ridiculously low levels, the markets react significantly. Keep in mind that we are talking about raising rates slightly from close to zero. Of course, most Americans don’t really recognize the Fed’s Federal Funds Rate. But if you look at something they are familiar with, such as rates on home loans, we can see the issue more clearly. Rates on home loans averaged over 7.5% for a generation from 1980 until 2010, a period of 30 years. Now rates have averaged around 4.0% for the past few years.
What happens if rates move up in the future? Will people stop buying homes? If someone is paying 4.0% on their home loan, higher rates would make them more reticent to sell their home in the future unless there is a major life change such as marriage, relocation or retirement. And certainly, they would be more reticent to refinance as well. Thus, if rates are going to rise from these unbelievably low levels, they would have to rise gradually such as not to have a significant affect upon the economy. The Federal Reserve Board will have to be very cognizant of these possibilities as they consider their future moves.
The Weekly Market Update
Rates rose again last week, continuing a trend of the past few weeks. For the week ending October 20, Freddie Mac announced that 30-year fixed rates rose to 3.52% from 3.47% the week before. The average for 15-year loans also increased to 2.79%, and the average for five-year adjustables rose to 2.85%. A year ago, 30-year fixed rates were at 3.79%, more than one-quarter of one percent higher than today's levels.
Attributed to Sean Becketti, Chief Economist, Freddie Mac -- "The rate on 30-year fixed-rate loans moved a solid 5 basis points to 3.52 percent while the 10-year Treasury yield remained relatively flat. This is the first week in over 4 months that rates have risen above 3.50 percent. This month, rates on home loans seem to be catching up to Treasury yields and returning to pre-Brexit levels."
Note: Rates indicated do not include fees and points and are provided for evidence of trends only. They should not be used for comparison purposes.