If a homeowner is financing a home, his or her buying power is directly related to mortgage interest rates. So when we begin to hear rumblings again that “interest rates can’t stay this low forever” and that the Federal Reserve will start raising interest rates again, what most of us really want to know is how that will affect us as American consumers. Let’s start with the basics:
The Federal Reserve System is the central bank of the United States that is actually made up of twelve regional Federal Reserve banks. So while it’s chartered by the government, it’s not actually owned or controlled by any branch of the government.
At the end of 2008, the Federal Reserve lowered interest rates when the housing market crashed and the economy was in a downward spiral because low interest rates help a struggling economy to grow and recover from a recession more quickly. But now that the economy is in a better state (as evidenced by lower unemployment rates and a more robust housing market), the Federal Reserve wants to begin consistently increasing interest rates a little at a time.
Why raise them at all? When interest rates are low, consumers tend to spend money instead of saving so prices increase, creating a false inflation that can later contribute to bubbles in the stock market and/or the housing market. If you look at housing prices across Middle Tennessee you’ll see an example of this inflation and while it’s not guaranteed to pop, the market certainly can’t withstand this level of rapid inflation over an extended period of time.
So in June of this year, the Federal Reserve forecasted that they would see a .9 percent increase by the end of the 2016 but they’ve been hesitant to raise rates that high and so their actual raising of rates has been much more conservative. They now believe we’ll be seeing just a .6 percent increase by the end of this year. And instead of the 1.6% estimate made rates in 2017, we think we will be seeing a more conservative 1.1% through the end of next year.
So what does this mean for mortgage rates? Rates may not even rise before the end of 2016 as the mortgage industries reaction to the Federal Reserve’s actions are generally pretty slow. By the end of 2017, however, we do think that we’ll be seeing rates of 3.75 to 4.25% on a 30-year fixed and 2.75% to 3.25% for a 15-year fixed.
Regardless of the actual timeline of the Federal Reserve, this fact remains: the housing market is hot here in Middle Tennessee and even with rate increases in 2017, mortgage interest rates will still be at all-time lows.