DON'T WAIT. CALL YOUR REALTOR NOW!
It had to happen. The New York Times news alert headline says Federal Reserve Raises Interest Rate Charged to Banks, In First Move Since 2008.
Is it a big deal? That remains to be seen. If you locked your loan yesterday, be happy. The rate you got isn't available today.
An Example From History
(You can't call it a lesson unless something has been learned...)
To put things in perspective, when Jimmy Carter defeated Gerald Ford in 1976, the discount rate stood at 5.25%. Two years prior, under Nixon, it had been higher, at 8%. Commodity prices were through the roof. (Google "oil prices 1973.") Inflation had taken hold, and the Federal Reserve decided that enough was enough.
The Fed started raising the Discount Rate to combat inflation.
In four short years, the discount rate rose from 5.25% to a staggering 13.00%. Remember that the discount rate is the rate banks pay to borrow the money they lend to you. You pay more.
What did that mean to consumers? I was a homebuilder in the 1980's. My buyers back then had first mortgages as high as 17%. (And we still sold new homes at the Jersey Shore.) Second mortgages were available at 21.5%.
Parallel to today...
Nixon was winding down the Vietnam war, and bringing home the troops. The NY Times headline on March 29th (the day the last of the US forces were out of Vietnam) was Nixon Sets Meat Price Ceilings at Both Wholesale and Retail; Asserts Costs 'Should Go Down'.
Congress was trying to force an outcome on the free market.
The result was inflation.
Rates had to go up to kill the monster, and economic results of the next decade were a template for for our current dilemma.
Moral of the story?
If you intend to finance the purchase of a home, better do it now! I recommend a 30 year fixed rate.
p.s. If you intend to qualify for the $8,000 first time homebuyer tax credit or the $6,500 credit, you must be in escrow by April 30.
Call your REALTOR now.
___________________
I'm Mike in Tucson, your preferred Tucson Mortgage Lender.
NMLS #223495
SUNSTREET MORTGAGE llc ~ Mortgage Bankers, Not Brokers!
Offices in Scottsdale, Tucson, and Nogales, AZ, and Albuquerque, NM.
Call me on my Blackberry (520) 349-9090
photo courtesy Kevin Chauvin, Flickr
Mike - I hope the Fed realizes this is a little early to be doing this and re-adjusts soon.
Bob,
Don't hold your breath...
Mike in Tucson
It's like our government says, "Hmmm, we have a problem...how can we make it worse?"
High jumpers in trac take baby steps before they gain momentum and leap over the bar. Not panic time ...but the sound of footprints. I remember the late 70's ...staggering interest rates
Interesting article, Mike...I just read a similar article on Mike Gordon's blog. Government intervention seems to be the topic lately both in the USA and in Canada.
Jo
Hi Mike,
You're right, it was only a matter of time. I also found your perspective interesting. Anyone who wasn't around evem 7-10 years ago would probably see things differently.
Btw, I was around too in high double diget 80's, I remember them well.
Mike,
Yup!
In 1973 we were glad to get gas, regardless of the price!
1985 found me financing million dollar second homes at Lake Tahoe with first mortgages at 21.5%! My clients were grateful I got them financed!
Bill
It's about time that this happened. Will it hurt some buyers, sure, just the ones who have been told over and over that this was coming.
Mike , we got a property under contract with a cash out refi at 5%, another lender was at 5.25. We felt lucky to get them locked in at that rate.
Nick,
Good timing! (And some good advice in there, too, I'm sure.)
Larry,
We've been saying it's coming. A lot of folks won't believe it until fixed rates hit 6%.
Bill,
I sure don't miss those days, but we did have some good times, nevertheless.
Lynda,
C'mon... I'm your father's age.
Jo,
I'd rather watch the Olympics. Canada's doing well in skating this evening so far.
Claude,
Either that's an old photo, or you have great genes. You don't look old enough.
Jeffrey,
We'll all figure out a way to make a living, tho.
Mike in Tucson
Mike- I agree we are heading toward higher rates.
Mike,
I think the FED is testing the waters to see what the market response is to the .25 bps increase. JMHO I'm sure they'd like to know what will happen next month after they stop buying Mortgage Securities,
In the 80's we were building with the cheap money at Cal-Vet and FMHA for 13%. LOL
Steve
Guess I was a luck one to have a fixed 30 year rate at 10% in 1980. We'll just have to see what effect this has going forward. Glad my current buyers are locked.
Mike,
We thought 10% was great.
Steve,
Headlines in the paper: 13% Cheap Money! LOL
Gary,
There was a need for loans then; we'll all still do business.
Mike in Tucson
GOOD MORNING MIKE! Boy did they ever jump - my first time home buyer locked one day too late! Whew talk about explaining how this happens in a matter of 48 hours was something! -- Gab
The government was careful to release statements that a rise in the discount rate does not affect mortgage rates.
Sure, sure.
This is just one more nail in the American consumer's economic coffin.
Nice that Mr. Bernanke waited a "respectful time" following his reappointment as Chairman to shoot this economic bullet at the heart of prospective home buyers.
The American consumer, the real estate industry and the mortgage industry have been squarely in the sights of the government for 15 months.
One of the first steps on the road to tyranny is to make the citizens supplicants. Home ownership was always a road to economic security for American citizens. That security had to be wiped out before steps to make the populace dependent on the government.
Lenn,
If you'll run for national office, I'll vote for you.
Gabrielle,
As humans, we're rooted in what was... in the past. Doesn't matter if it's the past week. If someone got 5% last week, I want it today. My most recent refinance borrowers locked Wednesday at 5.25%, fixed for 30 years. They listened to my recommendation.
Mike in Tucson
Rates sooner or later have to go up. People are living in Fairyland if they think otherwise. Thanks for sharing a post on an important topic.
Mike,
Isn't the $8000 tax credit applies to home-buyers who need to be in escrow by April 30th. Please confirm. Thanks.
With rates on the way up, Buyer purchasing power will be shrinking ! Time to start teaching everyone about buy downs again !
Michael,
Right you are.
Richard,
Edited with the correct date. Thanks for your comment.
Joseph,
It's time to move. No question now.
Mike in Tucson
No one has mentioned this, so I will :-)
I also remember back in the early 70s the interest rate PAID on a money market savings account or certificate of deposit was some crazy number like 15% !!!??!!
We all figured if we could just manage to sock away enough money for a few years.....
Mike - great post ... I'm reblogging, thank you!
Mike! Very interesting correlation to the 80's -- and very good points! Add onto that the increase in upfront MIP for FHA loans, and buyers need to get their lock in BEFORE April 5th!!!!!
It is about time. I think it needed to happen. If the Fed does not begin to take some money out of the system we will be right back like we were in the Seventies and Eighties. Better some pain now than a repeat of those type rates and Hyperinflation
Here we go. Interest rates have to go up, whether we need them low or not. We are in a global economy now, and once our government steps back from buying mortgages from Fannie Mae and Freddie Mac, someone else will step in - and want a much better rate of return. Japan and China buy a large percentage of our treasury bonds. They too will be looking for a higher rate. They are not necesssarily concerned about American well being. We have gotten ourselves in a mess and it's going to take some time to get us out of it.
Inflation? With all the government spending/borrowing? You MUST be kidding me? THAT has NEVER caused it before? Amazing how dumb we are. We just don't allow ourselves to pay attention to history when history paints a different picture than what we want to see.
Thank you
Funny were told that this has no affect on mortgage rates. It is why they didn't drop when they did. Now the rate was announced yesterday and mortgage rates rose almost 1%. Reminds me of gas prices
Back in the 80's we had fixed rate ASSUMABLE loans so we could still sell houses. Buyers assumed the loan and the sellers carried back a second if need be. We don't have any assumable loans to work with now.
So it won't be a repeat--it could be much worse. Lets just hope it does not get to that point again!!!
Great Post and Even better explanation. Thanks
This is a rise in the discount rate, not the Fed Funds rate. So it means that new money borrowed from the Fed (and not currently in the system) is more expensive. This shouldn't have much of an effect on mortgage rates at all. The bigger impact will be that the Fed is discontinuing their mortgage backed securities purchase program next month. I think rates will trend higher, but most signs show that inflation isn't about to explode. There are a lot of good reasons to buy now, but we are still deleveraging and deflation is still as much of a risk as inflation is.
I am no economic expert, but I have seen the Fed raise the discount rate and that hurst short term rates but not the long term. Investors in 10 and 30 year notes are very inflation conscious. Sometimes lowering the rate has lead to higher mortgages. I know that the 10 and 30 year bond does not have a singular effect on rates but is a strong influence. My greater concern would be the Fed stopping its buying of Fannie and Freddie.
This is truly a bummer for me. I have a loan with a 35 month lock in rate renewing next month. It's a commercial loan and the rate is tied directly into the discount rate. BUMMER! Oh well.
Mike,
I always have a good time when I'm with Brenda and our kids!
Business wise, survival was a matter of filling the needs of the clients, people have to have housing, rates are irrelevant if the clients perceivethe need! Allot of good people disagreed with me, I miss some them. It will be as it always has beenafter the next crisis. We have a choice bitch about how bad things are or continue to fill a need and prosper.
I miss the cars I drove in the '70's!
Bill
A lot of customers are in denial about rates. Just as we have been in denial about the accumulation of our national debt. 5 balance budgets since 1969 (1 Nixon/3 Clinton/1 Bush). No body saves, they just live on ever growing mountains of debt. We run deficits in good times and even bigger ones in bad times. If our nation was a credit card applicant I would be charging 25% to extend credit.
If you look at inflation over the past 30 years, locking a 30 yr rate at 5 or 5.5 is practically free money. Does anyone thing that can last forever? The late 70's and early 80's were the death of assumable conventional mortgages. The old rates being assumed were way below inflation and interest paid on deposits and what the FED was charging banks to borrow.
Get the rate while you can!
I agree with some of the commentary above that the raise in the discount rate should not affect long term rates like mortgage rates. The reason rates spiked up the past 2 days was mainly a very hot inflation reading. Inflation is the arch-enemy of long term investments such as mortgage-backed securities because inflation erodes the value of long term assets. The Fed must raise short term rates in order to combat inflation, and if they don't, we could see crazy inflation and mortgage rates back in the double-digits like in the 80's.
Mike: Interesting post. Today the stock market didn't like the rise in rates. I wouldn't be surprised if mortgage rates improve slightly although the long-term trend is probably up. Thanks for the post!
Well to those of us who have been around for awhile this is not something to be surprised about.
Not a good time to go up, but it will.
I'll reblog in a few days after you have your moment on the dashboard.
I remember the 70's, the 80's, the gas lines, the beef shortage especially someone killing another over a steak on the grill, economic times are changing. But we have good people like Mike to help us understand so that we can provide useful information to our clients.
Mike - I am surprised they kept the interest rates as low as they did for as long as they have.
I too remember the 70"s and 80"s - now being in the real estate business, I look at this change from a much different perspective. Thank you for the great blog - insight and a reminder to share with buyers ASAP!
I love the analogy, "what goes up....must come down!" how true.
Patricia/
what an attractive post - great content - great photo - nicely done
I can't say I didn't see this coming. And as always, Lenn puts it in the perspective that we really need to understand. They have to get their 'interest' from somewhere . . . it's getting hard out here for a pimp (pimps being the ones in government)
Oh here we go again. I remenber the days of 18% interest - By the time I stared buying homes it was around 10%. We used to think anything under 10% was a smoking deal....especially the old assumables. Remember them?
Wow, that's quite the jump! I wonder if we will ever see see rates that high again! (20% or more). I wonder if there were hard money lenders back then and what they charged...
David in Boston
Mike - The climbing rate is great for those who prefer cash savings and are looking for a better return than right now ... the big question is how high will they go.
Markets go up and they go down. We've been down and now.... ????
I've been encouraging buyers to get on the bus since January.
People need to realize that there is no better time than NOW to buy. Thanks for your post.
Ah yes, 1973. I remember being 10 years old and only being able to buy gas if on certain days of the week, based on an odd or even last number on our license plate.
Turned out there was no oil shortage, just a crisis in leadership and market manipulation.
I think that began the era of cynicism toward government and lowered expectations on ever hearing the truth from our government.
I think we are a little skiddish about what is going to happen with interest rates. I cannot imagine them rising. Hope all my buyers listen to your advice. :)
Cal
All,
Thanks for commenting; whatever did we do before search engines? Google provided the historical data for the Discount Rate and the data for events surrounding the rise and fall of that Rate over time.
Mike in Tucson
I bought my first house back then, owner financed. Bottom line this action may be the last hope of saving the country if we can get congress to start tightening it's belt. We have all lived High On The Hog and now comes payback.
Mike,
This is a very interesting study. I wold hope that those sitting on the fence jump off and move towards their new home now.
I'm interested to see what happens next given that interest rates are likely moving back up for good.
There's no need to panic... there really isn't. I remember back in 1983 the mortgage rate was around 12%. It started creeping up... and reached it's peak at 17.5% Each time it went up... we all thought sales would stop, but they didn't. People kept buying... each time the rate jumped... in mortal fear that it would go up again... which it did.
Sure, it was a very different market then, but even when the rate was 16%... buyers continued to buy, and sellers continued to sell.
Perhaps this will get the "fence-sitters" off the fence. It usually does.
I love your title!!! I agree with you, and am fearful of where we go with interest rates going up....
I remember in 1982, when I left home for college, I had a CD that was earning 10.5% or something crazy like that!
I don't have the historical perspective that many of you have here (meaning I'm just not that old), but isn't there opportunity in every market? It just depends upon how bad you want success and how quickly you can adjust to the new market conditions.
Am I being enthusiastic and optimistic or am I just being naive?
This is unfortunate to hear but not surprising. I hope my buyers get their rate locked soon. I'm going to re-blog this.
@ Rick in # 58: Hey Buster ! I'm not really that old. I'm just "experienced !" Or... as some put it... I am a "seasoned agent." Uh huh... LOL.
Mike
Thanks for the analysis.
Its interesting to see some of the comments regarding how the government is getting involved in the re industry to its detriment.
The government has been guiding the real estate marketing for nearly 100 years mostly to boost home ownership with
-the creation of Fannie Mae (1938) and Freddie Mac (1970) setting loan standards and purchasing mortgage back securities from banks that meet their criteria making it more lucrative for banks to engage in lending as they can repackage mortgages into securities and make more money than the loan it self
-setting interest rates through the federal reserve bank created by congress in 1913. The Fed has opted the past 30 years to keep interest rates artificially low to encourage consumption and home ownership.
-the creation of interest deductions on mortgages - there is not equivalent deduction for rent payments. In a free market without government intervention via tax breaks people would purchase homes on their market benefits, not because of a tax incentive, and certainly home ownership rates would be lower..
-the new stimulus first time home buyers credit (2009) and its extention-further government encouragement of the housing market
-Congress pressure on the Financial Accounting Standards board to permit banks to "mark-to market" underperforming loans so that they have a disincentive to foreclosure, thereby ensuring that a flood of foreclosures do not flood the market (as they would in a free market) and further depress housing prices (2009)- this is the "shadow inventory" issue
-creation of the Department of Housing and Urban Development (1965)
-passing of The Fair Housing act (1968)
-Zoning laws that keep home prices higher by limiting new construction, thereby propping up home values
To say that the government is harming the re industry when it has spent the better part of the last century propping it up outside of the free market, is simply not correct.
Hey look out! The sky is falling!!
Oh wait, market prices go up, market prices go down.
My first manager told me about trying to sell refinance mortgages in the mid 1950's, to people who screamed in his face that FDR and the FHA saved their homes, and they'd pay their home off, and never take out another loan again.
We survived the deregulation of the S&L's, and some people made fortunes out of the wreckage.
We survived the real estate crash of the late 80's-early 90's, and some people made fortunes out of the wreckage.
Those who won did so regardless of where interest rates were, or what the government did. If you are waiting for Uncle Sam to save you, don't hold your breath. If you're waiting for China, and the Saudis to pump in billions more dollars to US real estate, they won't get fooled again.
Stop crying, get out, work hard, and go the extra mile. You may find yourself succeeding no matter what the banks, or the government do.
Good post-- those who waited will regret it.... all the best.
Mike--Great post here! I reblogged it....
Thanks ,Mike! I hope this rate increase will push some of the fence sitters to move their butts!
Mike, I also remember interest rates that high. I am surprised it has taken this long for interest rates to start creeping up.
Good post and good points. One way or another the rates are going to go up. I will re-post this.
Excellent post Mike. We know that there can't be this much debt in the market without a rise in rates...
It's just too bad to see this happening BEFORE people could go back to work.
Interesting the wide spread of comments on how much rates went up Friday. I only saw 1/8% increase from Thursday and was still near historic lows. Tell your buyers to check around. Not all lenders have access to the same rates, and some brokers will take advantage by hiking their rates more than needed as a profit-grab.
The Discount hike does NOT directly influence rates, but the overall emotion of the markets ... knee-jerk-reaction ... is what had the impact.
We all know the interest rate is going to rise. I think the Fed is trying to time the market in order to prevent another overheating. Let's see what happens in the next few months. Lots of changes ahead....
Mike,
We knew it had to happen sooner than later, just was wishing for later.
All the best, Michelle
I've been discussing with my clients for the past few months that though I don't know if prices will go down further on homes, but what I have been certain of is that sooner or later inflation will hit, interest rates will go up and so will the cost of a mortgage.
Great post! REBLOGGED!
-- Danny
It certainly does look like interest rates will be going up. It is a good time to buy for many buyers...
Mike - Thank you for sharing an informative and helpful blog.
John
Great post and great responses. Congratulations on the feature!
That means our side of the border is coming soon to. We do not have 30 yr but our 10 year is about 5.5% or so. Variable just had a client quoted plrine less .04 which would lock it at whatever our prime rate is minus the .04 so right now that means 1.85% mortgage until prime moves.
Mike ~ Like you said "It's bound to happen" It can't stay this way forever. I think it is long over due.
Great information, thanks.
Jon Crompton
Great post-I am re-blogging to get the information out to my buyers!
Lisa,
Thanks for reblogging the post!
Jon,
You're welcome!
Monique,
It was bound to happen, and the sooner we get the inventory pared down, the sooner we'll all recover.
All,
Thanks for your comments and 24 reblogs of the post!
Mike in Tucson
Great advice! The rates can't stay this low forever, so now is certainly a great time to be buying (or refinancing).
Matt,
True that is! Thanks for stopping by to comment.
Mike in Tucson
Mike... From what I know and how things work within mortgage lending, the Fed Discount rate hardly ever affects mortgage interest rates. Some of the better comments that I think are spot on are...
Comments :
- Comment # 71 - - Comment # 31 - - Comment # 32 -
I guess my whole point to this is that we need to be careful on what and how we alert others in the real estate and mortgage industry. Sure, I don't have a crystal ball... and sure, rates are still very low and hardly moved, even after this news. But the Fed discount rate should have been defined. It's the rate for short term funds. In my opinion, the Fed Discount rate in this instance might only apply 5% of the time. There are so many other factors that change interest rates. The reason why rates could change is because of the quick news of this, if it wasn't expected. But it's not the underlining factor for rates to move good or bad. As I mentioned, the comments above I think are spot on.