News & Opinions
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Interest Rates Creep Back into the Minds of Consumers: A New Look at an Old Headline
Madison Inselmann / Metrostudy / June 28, 2013
Ben Bernanke moved markets with his comments after the recent Federal Open Market Committee meeting when hinting that the Federal Reserve will/may/could/should back off of its $85 billion a month bond buying program. As a result, the stock gyrated wildly like an 7.0 Richter Scale earthquake printout driving a notable jump in interest rates. Similar to the violence of being startled awake from a deep sleep, after a four year monetary policy drumbeat…the market had a mild heart attack as it was shocked from it’s comfort zone.
Of course things have normalized, to a certain degree, as they typically do after immediate reactions to economic news, but it caused me to consider what impact interest rates will have on the home buying market when/if/should they begin to trend upward. Shoot, I spoke to a new home salesperson that shared that a buyer delayed the closing because they wanted to wait for rates to drop back down. I was confounded by this as the difference between 3.4% and 3.9% (approximately $56 per month on a $200,000 loan) pales in comparison to the fact that we’ve been spoiled below 4% for so long and that our party may be coming to an end.
As market analysts, we tend to believe that metrics seek their trend. For the last 20 years, the average rate on a 30-year mortgage has been 6.5%, two percentage points higher than the rate today (June 27th, 2013). Assuming the Federal Reserve will smoothly release rates once they end their bond program, we looked how mortgage qualification reacts to rates being at 3.5%, 5%, and 6.5%. In the graphic below we hold constant the monthly principal and interest payment ($898) assuming that consumers (if they’re like me at a farmer’s market) look to spend as much as they can.