The Federal Open Market Committee is preparing to shake up the economic landscape. At its monthly meeting, the FOMC held interest rates near zero but gave some indication that it will move to raise interest rates sooner than expected.

Furthermore, members said in a post-meeting statement, “If progress continues broadly as expected, the Committee judges that a moderation in the pace of asset purchases may soon be warranted.” Federal Reserve Chair Jerome Powell gave a more clear timeline in his statement, saying, “While no decisions were made, participants generally viewed that so long as the recovery remains on track, a gradual tapering process that concludes around the middle of next year is likely to be appropriate.”

We’ve discussed these asset purchases regularly in this blog. Since the onset of the pandemic, the Fed has been buying $120 billion a month worth of U.S. Treasury bonds and mortgage-backed securities. This was in an effort to keep the housing market, and the economy, afloat. That in turn caused interest rates to decrease significantly. The continued monthly purchase of these assets, at that $120 billion level, has been one of the main contributing factors that have kept mortgage interest rates at historic lows. The latest numbers from Freddie Mac show the average rate on a 30-year fixed-rate mortgage is still just 2.88%. It is interesting to note what Freddie Mac’s economists say is also contributing to downward pressure on mortgage rates. Their analysis concluded that, “The slowdown in economic growth around the world has caused a flight to the quality of the U.S. financial markets. This has led to a rise in foreign investor purchases of U.S. Treasuries, causing mortgage rates to remain in place, despite the increasing dispersion of inflation across different consumer goods and services.”

The Fed’s gradual tapering of bond purchases is expected to have a big impact on the mortgage industry. Many economists have been predicting a rise in mortgage interest rates this year; while we haven’t seen that come to fruition yet, it will. Keep in mind, when we talk about a rise in interest rates, we are talking about going up gradually and slightly from historic lows. You have to go back to 2019 to find the last time that the average 30-year fixed-rate mortgage was above 4%. You have to go back a full decade to get to the last time that rates eclipsed 5%. If you really want to dive deep, rates were above 10% in 1990. For those who feel like 1990 was yesterday, that was a full 21 years ago.

We say all that to remind people that a 3-4% interest rate in the grand scheme of things is still a very low rate. As always, consumers’ rates will vary based on a lot of factors like loan type and credit history. Make sure you are talking with a mortgage professional to calculate an accurate interest rate.

Of note:
  • August housing starts show homebuilders started construction on 1.615 million homes in August—a 17.4% annual increase, according to the Census Bureau.
  • The Mortgage Bankers Association reports mortgage applications increased 4.9% weekly with the purchase index increased by 12% week-over-week. The purchase index decreased 13% on an annual basis.
  • Existing home sales for August came in slightly above estimates, hitting 5.88 million according to the National Association of Realtors. 

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