Huntsville Alabama Houses Blog

Despite recent cuts in key rates, mortgage rates are on the rise. Huh? How's that?

Without getting too technical or detailed here, let me explain a little:

A lot more goes into mortgage interest rates than just the Federal Reserve's influence. In fact, they are only a small part of it. Other factors influence the rate, such as 10 year treasury bills, supply and demand, the state of the economy, speculation among investors about the future, and inflation just to name a few.

Remember your basic economics class in school? If demand goes up, price goes up. If demand goes down, price goes down. If supply goes up, price goes down and if supply goes down price goes up.

Well, you may be thinking, "wait a minute... demand for loans is going down so shouldn't the interest rate go down too?" In this particular case, supply for home loans has been cut more sharply than has demand. Sub-prime loans have practically disappeared and lenders have tightened their lending standards. Therefore, supply is down, so it's ONE possible reason rates could be on the rise.

Rising energy costs are fueling inflation. Deja vu... Remember the 70's? Oil supply was low, driving prices up which in turn fueled inflation of the economy. Something very similar is happening right now. Energy costs are rising, forcing businesses to charge more for products and services, which is driving inflation. In the late 70's and early 80's, the 12% inflation rate was synonymous with rising mortgage interest rates, which peaked at 21% in 1981!

Can you imagine a 21% interest rate on a $100,000 home? Hopefully, our rates won't rise that much.

Also, let's not forget future speculation. It's basically the same type of speculation you see in the futures market, where investors make educated investing decisions on the future. Speculation in the mortgage market could influence rates. If the future looks bright, rates will rise.

Now, I know it sounds like I'm backstepping from a previous post where I said a rate cut was good news. But, a lot has happened since then and for all practical purposes, the interest rates would typically be steady or going lower as a result. However, higher than expected inflation, rising energy costs, and many other things have changed. I digress.