With interest rates at historic lows, many are starting to wonder how long they will remain at these levels. East Bay Realtor thinks low-interest rates are good for homebuyers for two important reasons:
1. Low interest rates increase demand for homes, which leads to increased competition among buyers. This tends to cause home prices to rise.
2. Lower rates allow home buyers to spend more for a home while keeping their monthly payments at affordable levels.
How long will mortgage interest rates remain low? Many East Bay Realtor's believes rates will remain low for the foreseeable future, but that is no guarantee.
Top Factors For Mortgage Interest Rates
Here are a few things to keep an eye on that can influence interest rates according to an East Bay Realtor:
The Federal Reserve (The Fed)
In the United States, mortgage rates will be impacted by the Federal Reserve policy: if the Fed raises interest rates, mortgage rates will increase also. On July 28, 2021, the Fed maintained its fed funds rate at a range of 0% to .25%.
The Fed has the challenging task of finding the perfect balance between keeping prices stable while attaining maximum employment levels. This is accomplished by controlling short-term interest rates. Lower interest rates help stimulate economic activity, while higher rates have the opposite effect, which is to decrease activity. As economies around the world attempt to rebound from covid shutdowns, many see the Fed keeping interest rates low as the most viable option.
Supply and Demand
Higher demand for homes could increase mortgage interest rates, while lower demand could decrease rates. Banks play a key role here as well: the more money a bank has to lend, the more credit the potential home buyer has access to. This could translate into lower mortgage interest rates. On the flip side, a smaller money supply will make home loans more expensive
Inflation doesn’t affect mortgage rates directly, but it could trigger a reaction in the housing market. For example, if inflation increases, it could reduce purchasing power by causing the price of goods and services to rise. This could have an impact on home purchases as far as the cost of borrowing money and interest rates.
The U.S. annual inflation rate is 5.4% for the 12 months ended July 2021. Published by the U.S. Labor Department, the next inflation update is scheduled for release on September 14, 2021.
Events on the other side of the world can have a direct impact on the US economy. The following world events affected the US economy and mortgage interest rates:
- World War II. The war decreased the production of both housing and consumer goods in the United States. As demand for homes decreased, interest rates dropped as well.
- 1973 Oil Embargo. The Arab Oil Embargo caused the United States to go into a recession, which led to high inflation and the Fed raising interest rates. Interest rates eventually reached 17% in the 80’s, making houses more expensive to purchase.
- Brexit. In 2016, the United Kingdom voted to leave the European union, causing the US stock market to plunge. Investors moved money to “safer” investments such as bonds and mortgage-backed securities. This increased the amount of money available to lend, thus lowering mortgage interest rates.
The Bottom Line
Home interest rates are forecasted to remain low for the foreseeable future. With that said, inflation, global events, and other situations could cause them to rise unexpectedly. Knowing the potential triggers could be key for East Bay Realtor in predicting changes in mortgage interest rates.
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East Bay CA is known for it's good economy, beautiful landscapes and extremely popular housing market. When other states and territories have experienced decline in housing prices the Bay Area in general has remained strong. This doesn't mean you should not diversify your portfolio across many states, but our East Bay CA Realtors agree that this is certainly a strong place to start for a novice investor. There are even some great low cost homes that are ripe for renovation.
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