Rising rates on horizon, but how far?
On the heels of the announcement that May was one of the best months in recent history for pending sales of homes comes the Federal Reserve Bank's announcement that Quantitative Easing round three is coming to an end causing fear that interest rates will rise. In fact, interest rates did rise slightly last week - up five one hundredths of a percent. Whether this trend will continue for the short term is hard to say but the uptick in Treasury Bond yields indicates that mortgage rates may have seen the last of their new bottom rates established last month. As of market close on Friday, the yield on Treasury Bonds was up by 0.16 percent from a day earlier. Since mortgage rates are directly affected by these yields, we can anticipate incremental increases to those rates as well.
After Wednesday's Fed meeting, the meeting's minutes showed there was a continuation of a debate central bank officials have been having over how to signal the first move to start raising its benchmark short-term interest rate, which has been at a record low near zero since December 2008. The minutes showed that Fed officials discussed a question they have been getting about whether the last reduction in purchases might total $15 billion or $5 billion. According to the minutes, the participants said it would be appropriate to reduce the bond purchases by $15 billion in the last move, which would occur at the October meeting, rather than hold off and make a final $5 billion reduction in December. October then would be the end of QE3 which has been reducing its purchases of Treasury Bonds by about $10 billion a month for the last several months. Down from the $85 billion a month at QE3's inception, the Fed purchases after October will now be zero, ending the year with two months of no Fed purchases which should give us an indication of what to expect next year.
Does this mean a sharp increase in mortgage interest rates is looming in October? No one knows for sure and the Fed maintains that it will not begin dumping its $4.5 trillion in assets from mortgage backed securities and Treasury Bills, but stated a preference for a more gradual disposal of those assets in order to prevent a rapid increase in interest rates. In the end, the Fed stated that rates will likely remain low for a "considerable time" after the bond purchases end.
May's increase in housing purchases have been directly attributed to the low interest rates on mortgages. According to the National Association of Realtors pending sales in May increased 6.1 percent to 103.9 in May from 97.9 in April, but still remain 5.2 percent below May 2013 (109.6). May's 6.1 percent increase was the largest month-over-month gain since April 2010 (9.6 percent), when first-time homebuyers rushed to sign purchase contracts before a popular tax credit program ended.
So we, like you, wait to see what will come of the current, vibrant housing market locally when interest rates rise. For now at least, rates are exceptionally good and if we trust the Fed, could remain attractive for some time to come. The proof may well be in the last two months of this year after the Fed quits encouraging the Treasury to print money by buying its bonds.
Trust an expert....call a Realtor. Call your Realtor or visit www.cdarealtors.com to search properties on the Multiple Listing Service or to find a Realtor member who will represent your best interests.
Kim Cooper is a real estate broker and the spokesman for the Coeur d'Alene Association of Realtors. Kim and the association invite your feedback and input for this column. You may contact them by writing to the Coeur d'Alene Association of Realtors, 409 W. Neider, Coeur d'Alene, ID 83815 or by calling (208) 667-0664.