June 26, 2019

US Federal Reserve pauses interest rate hikes due to quickly changing economic factors

By. Jonathan Yokley, Owner/Realtor, Texas Roadrunner Realty
June 26th, 2019 - San Antonio, TX

Key takeaways

  •  Mortgage interest rates aren’t expected to rise much in 2019.

  • While rates will likely remain lower for longer, but they will rise sooner than later.

  • Lower interest rates increase buying power and selling power.

Why did the Fed pivot?

If you’ve been paying attention to the financial news, you may have heard the Federal Reserve will not increase interest rates (FFR) this quarter and not likely for the remainder of the year. This is counterintuitive to what we were expecting this time last year as all signs were on rates increasing in 2019. What happened?

  • Escalated trade tensions.

  • Rising geopolitical risk.

  • Numerous signals indicate slowing economy.

Q: What does this mean for folks looking to borrow money to purchase a home?
A: This may be the best time to buy your first home, or sell and move up to your next home. I believe rates are going to rise soon which will reduce your buying power should you need a mortgage to buy a home.

Rates will likely remain as low as they are now for longer, but will soon enough start to rise

It is likely through the end of 2019 that well qualified buyers can still take advantage of some of the lowest rates in history. [INTERESTING FACT] the long-term average of a 30-year mortgage rate usUS history is 8.04%1

At the time this article’s latest survey of the nation’s largest mortgage lenders, the benchmark 30-year fixed mortgage rate is 3.93 percent with an APR of 4.05 percent. The average 15-year fixed mortgage rate is 3.22 percent with an APR of 3.41 percent. The 5/1 adjustable-rate mortgage (ARM) rate is 3.87 percent with an APR of 6.97 percent2.

The markets will continue to keep an eye on what comes out of the Fed, but “sideways momentum” is likely to continue3. Sideways momentum is an industry term basically meaning not much is likely to happen this year one way or another. Rates likely won’t rise or fall and growth will likely be ‘meh.

There are several indicators that the US economy is heading for another recession

There are several indicators that the economy is set slow into a recession in the very near future. Industry experts agree that our economy is in the “late cycle” and set to move to recession. [INTERESTING FACT] Economy cycles are: Early, Mid, Late, Recession. Most agree the US economy is in the tail-end of the late economic stage. Several factors point to this, including:

  • Economic growth is slowing – we’re seeing rising wages and a tighter labor market (low unemployment) which will put more stress on US companies.

  • Inverted yield curve – you don’t have to fully understand what this means, but you may hear it come up on the news. It happens when long-term interest rates are worth less than short-term rates4. The inverted yield curve is a tale-tale sign that the US economy is heading into recession.

  • Federal Reserve hits the breaks – you have heard that the Feds are keeping interest rates flat. This is way different than what we were seeing only 6 months ago when the Fed was talking about brining rates up. This is why we believe mortgage rates will remain the same through the end of this year.

Q: Why does this matter? What does it all mean for home buyers/sellers?
A: The reason this matters is two-fold.

1. For buyers it means now we know you can take advantage of the lowest rates in history. Why? If, for example, you had a $1,300 monthly budget with 3.5% as an FHA down payment you could afford a $200,000 home. If you were to wait and interest rates moved up to 6%, you’d only be able to afford a $160,000 home5. This is what buying power means… the lower the rate, the more home you can buy with the same monthly payment.

2. For sellers it is just as important. If you’re selling and buying the reason #1 applies to the home you’re purchasing, but again, is just as relevant on the sell-side. The lower rates are, the larger pool of buyers there will be to purchase your home. This is the case we’re experiencing in San Antonio and all over Texas right now (and for the past decade). Tons of buyers because of low rates means SELLER’S MARKET. The seller’s market won’t last long, this article shares the WHY.

NOW is the time to get off sidelines

Have you been sitting on the sidelines waiting to pull the trigger on buying your first home, upgrading, downsizing, or moving on? I’d like to suggest you look at the economic indicators above, whether or not you need to borrow money, and take them as a well-educated reason to get off the sidelines.

SIDELINE BUYERS: Rates are going up which will reduce your buying power. If you’re in the position to buy consider doing so this year before rates inevitably rise. As of now, we feel rates will remain low through Q4 2019 the current economic/geopolitical uncertainty could change that at any time. Talk to your mortgage lender, or talk to ours, and take the step while we have a predictable market.

SIDELINE SELLERS: Now is the time to sell! Whether you’re personally ready to sell and move up/down/over or thinking of liquidating an investment property or second home, now is the time. Values are higher than ever in our history, the pool of buyers is the biggest since the great recession, and most importantly – most these buyers are well qualified and have money to put down. Get off the sidelines … contact us for more detail.

Roadunner’s take

The common theme here is NOW is the time. This isn’t a sales tactic or fear mongering… It’s simple economic truth (as we know it). 2019 should be good for buying and selling because of the current environment. Our current economic cycle has been on a nearly decade-long run and set to change or make a correction. When this happens it will likely have a fast and direct negative impact on the finance, real estate, and construction industries.

5. | $200k home w/ 3.5% down FHA loan payment would be $1,285 @ 4% interest rate. At 6% interest rate the same $200k home now costs: $1,520 / mo., an increase in $235 / mo. Another way to look at it, is that if your monthly budget is: $1,285, right now you can afford a $200,000 home with rates at 4%. If rates jump to 6% you can now only afford a $160,000 home for the same $1,285 / mo.

​​​​​​​Johnathan Yokley
24165 IH-10 West, Suite 217-170 San Antonio, TX 78257