What To Say When Rates Hit 5%

The reduction in interest rates around Memorial Day gave people false hope that rates may drop further. Don’t bet on it. Remember, the Fed will be buying even fewer Treasury bills and mortgage bonds beginning in July due to their Quantitative Tightening program. So far, the Fed’s balance has shrunk by $117 billion to $4.1 trillion. Thus, there is less demand and if supply stays the same, prices have to drop, which means higher rates.

Barry Habib, one of the top experts in our country, thinks we could see the 10 Year Treasury Bill hit 3.35% in July. This means we will see mortgage rates above 5% in July. We can’t let a mortgage rate > 5% scare home buyers away for 3 reasons. First, we didn’t see rates below 5% until April 2009. My wife and I bought our first home in 2000 and our rate was 8.50%. Second, higher long-term rates are a symptom of an economy that is growing faster than it has for over a decade. This is a good sign! Plus, unemployment is incredibly low.

Third, we haven’t had a recession in nearly 10 years and a recession is bound to happen in the next few years and when it does, mortgage rates will drop and we may see rates in the 4’s again. So, today’s home buyers may have an excellent opportunity to refinance in the next 3-5 years and save money on their mortgage payment at that time while enjoying the benefits of appreciation and principal reduction.