Following the2008 financial crisis, the US housing market plunged into chaos. In the subsequent years, the market did recover, but the governing financial institutions kept mortgage rates low. The idea behind this was to encourage prospective buyers to purchase property to prevent stagnation.
This “golden era” of low mortgage rates seemingly ended in February 2018 when the average rate for a 30-year fixed mortgage increased to 4.38 percent. But why the sudden shift? Today we’re going to look at why mortgage rates are rising so fast in the US.
Supply and Demand
Get ready for a crash course on economics! We promise to keep things simple, but we’re going to explore the relationship between supply and demand.
Back in 2008 during the height of the financial crisis, millions of Americans lost their homes because they defaulted on mortgage payments. As a result, the market was flooded with a high volume of property.
Once the economy stabilized in 2010, interest rates were strategically kept low to reduce supply and increase demand. As a result, the housing market rebounded quickly, attracting a mix of foreign investment and wealthy Americans looking to scoop up a vacation rental.
But in 2018, we’ve reached a point where the demand for property has now outpaced supply, which contributes to why mortgage rates have suddenly shifted. So if you’re a prospective buyer, it’s crucial to move before another increase is implemented.
A financial governing body determines interest rates in the United States. This includes the Federal Reserve, US Treasury, and major banks across the country. These institutions closely monitor the economy and calculate the rate of inflation. Most developed countries aim for an inflation rate of two percent.
A range of factors can cause inflation, but in this specific case, experts point the finger at consumer confidence. This occurs when wages rise, and consumers start to spend more money. In turn, suppliers hike up their prices due to increasing demand, and everyday items suddenly become very expensive. So to combat widespread inflation, financial institutions hike up mortgage rates.
What’s going to happen in the future? Consumers can expect mortgage rates to continue to increase. There’s a strong demand, low supply, and the fear of inflation that contributes to the decision-making factors made by financial institutions. The takeaway? If you’re thinking about purchasing a home in the near future, act before it’s too late!