Over the past couple of weeks, a lot of news has focused on the increase in mortgage rates and rate volatility as the economy continues to improve. This is a key issue for trust deed investment as private lending rates are largely determined by these mortgage rates. Yet the relation isn’t strictly reflective, and instead is often times inversely related. With the recent drop in rates over the past five years, our lending rates have increased. Weak job numbers and a sluggish economy caused the Federal Reserve Bank to lower interest rates in order to encourage conventional lending in a time when spending and investing was at a lull.
Recent gains in job numbers and expectations of a resurgent economy have allowed the Feds to reduce or hint at reducing their earlier programs and as a result, there have been increases in mortage interest rates. This in turn will eventually push up mortgage rates back to pre-recession levels. Perhaps this will drop our own lending rates back down to previous levels.
As the mortgage rate continues to inflate, it has a variety of effects on the real estate market. Rates of refinancing decreased, with 15% fewer refinancing applications from the week before, dropping to the lowest point in two years. The Purchasing Index decreased by 3% since last week as well, with less people interested in buying homes. Yet this isn’t to say the housing market it about to falter. In fact, growth in the housing market has been a key factor in returning the economy to pre-recession levels. Housing starts have increased continually almost every month since last year, putting the total gain at roughly 26% from this time last year. And home values have been increasing as well, with more and more home owners seeing positive equity return to their homes. With all of these strong indicators of growth, an increased mortgage rate is considered by many negligible. Ara Hovnanian, owner and CEO of Hovnanian Enterprises, one of the largest homebuilders in the US, recently came on CNBC, claiming that the steady rise in mortgage rates would not hinder the growth that has been constant over the past year.
As a potential investor, what does this all mean to you? The rise in mortgage rates won’t directly impact your investments as they would if you owned the property. And since property values are continually increasing, loans taken out by borrowers will be more secure as their equity allows them to better pay back the loan. In all, the rising mortgage rates mean relatively little to an investor, but the overall growth of the housing market makes it a better investment than most.