What the Heck Happened to Interest Rates This Week?

This week the Fed actually has seen positive news in the economy and believes that moving forward, we will see an improvement in home values, confidence and the overall economy.  Rates moving back up to where they should be is a actually a good thing. The reason why rates have been maintained artificially for five years is because our economy was sick. It is getting better, and the doctor (Bernanke) is prescribing less medicine. That’s good news! We are healing, so do not be alarmed that rates spiked up so quickly this week.They most likely will settled back down a bit.

The magnitude of the rapid rise in mortgage rates has been shocking, but the reason is clear. To help stabilize financial markets and boost the economy during the financial crisis, the Fed initiated an unprecedented program to purchase enormous quantities of Treasuries and Mortgage-Backed Securities (MBS). The added demand from the Fed distorted MBS markets and pushed mortgage rates down to historically low levels. In recent years, analysts have attempted to estimate the impact of the Fed's bond buying on MBS prices, and some have said that mortgage rates would have been as much as 1.50% higher without the Fed purchases.

Now, the economy is no longer in recession. With steady economic growth, the Fed has indicated that it's almost time to scale back, or taper, its bond purchases. Investors are now trying to determine the "proper" level of mortgage rates in a growing economy in the absence of unnatural demand from the Fed. Unfortunately, most investors would rather be safe than sorry, meaning that they would rather continue to sell MBS instead of guessing if mortgage rates have moved "high enough.” From one point of view, mortgage rates are still just back at levels last seen about two years ago when the economic outlook was much weaker. In any event, if you believe you want to purchase property, now truly is a good time before rates go up and values continue to grow.

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