Where are we headed?


Rising interest rates
Just under two weeks ago, the Federal Reserve ended their bond-buying program known as Quantitative Easing. We discussed this program quite a bit last year. If you are unfamiliar with it, click here, here and here.

In a nutshell, due to the housing crisis, in 2008 the Federal Reserve implemented a bond-buying program ($85 billion dollars spent per month on mortgage and Treasury bonds) known as Quantitative Easing. This program was part of an overall stimulus package . It was created to encourage lending and buying and helped people afford long-term loans with low interest rates. The program helped to stimulate the economy and kept interest rates on mortgages low.

During a good part of 2013, there was lots of chatter about whether or not the Fed was going to begin to taper this program–-thus potentially leading to increased interest rates. They did begin to taper a year ago, but initially started off “small.” Instead of spending $85 billion a month, they cut it back to $75 billion. Interest rates remained low for the year, but the discussion continued about how much longer the Fed would keep the program going.

On October 29th of this year, they officially ended the program after stating there had been enough economic recovery to warrant its end. Many now wonder what will happen as a result. According to Lawrence Summers, a former U.S. Treasury Secretary, “We’ll live just fine without QE [quantitative easing]. Interest rates at the 10-year are now much lower, not much higher, than they were before QE started.”

House question mark

Let’s take a look at interest rates over the past year. (Click the graph for a bigger view.)

Freddie chart Nov-Nov 13-14

The beginning of 2014 saw interest rates for 30-year fixed rate-rate mortgages at above 4% with a weekly-average high of 4.53% on January 2nd. The percentages gradually went down over the year with occasional increases, but an overall downward trend. Since the announcement by the Fed, we have seen a very small rise in rates over the last two weeks. Rates on October 30th were 3.98% and 4.02% on November 6th. It will be interesting to see where they head now.

Many economists project that the rates will rise and that we will see numbers in the 5% and possibly even 6% range. We will see what happens.

[Sources: Realtor Magazine, Freddie Mac]

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