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The Direction of Interest Rates in 2013


The Direction of Interest Rates

Orange County, CA – It’s fair to say that 2012 was the year for falling mortgage interest rates. There’s no doubt that it has been a great year for anyone who was looking to buy property or refinance an existing agreement. As we step into the New Year though, it’s important to think about what lies ahead. Can we expect another year of dropping interest rates, or will things tighten up a little bit? By looking at the very back end of 2012 we can certainly have a good idea of how things might pan out.

By the end of the year, the average conforming 30 year fixed rate mortgage tumbled by another 2 basis points to 3.350%. This is a half of a percentage point lower than it was a year ago. If we look at the course of the past year, we can see that the average 30 year fixed mortgage rate sits at 3.66%. That’s an incredibly low average figure, and is indeed the lowest average interest rate ever throughout a calendar year.

Taking this into account, it is perhaps not surprising to learn that there is a strong likelihood of increasing interest rates throughout 2013. The simple fact that interest rates are the lowest they have ever been should probably indicate to us that interest rates will rise. But the likely change of trajectory is in reality set in place by the changing landscape of the economy. 2012 had in place the perfect set of situations to keep interest rates down. A lack of political stability caused by the impending presidential election, high unemployment and struggling domestic and global economies created a low interest rate environment. Time after time the Federal Reserve Bank decided to keep the Federal Funds interest rate stable. In December, they kept the target for the Federal Funds rate at 0 to 0.250%. But this time they pegged it to unemployment. In earlier statements the Federal Reserve Bank had stated that they would keep the rate at current levels until 2015. Now they say they will keep it steady as long as unemployment remains above 6.50%. Currently the unemployment rate is 7.8%.

As we march into 2013, there is a different landscape to observe. The shoots of recovery may well be green, but they are there none the less. A second term for Barack Obama means the insecurity of unknown leadership is behind us. A last minute fiscal cliff compromise and rising house prices has brought fresh hope of a brighter future. All of these things point to a rise in mortgage interest rates.

However, we are not out of the weeds yet. The fiscal cliff compromise failed to address deficit reduction measures. The country’s ballooning obligations for Medicare and Social Security still need to be hashed out. This will likely happen in the next few months when the debt ceiling talks resume. Republicans will likely dig their heels in to reduce expenses. If significant steps aren’t taken then Moody’s & Fitch may downgrade the U.S debt rating. If that happens then consumer credit will be impacted as bond investors are likely to demand higher rates of return.

Of course, none of us have a crystal ball, and the possibility of interest rates falling further does exist. There’s no way of being sure, but taking into account the current economic and political climate at the moment, it would seem likely that interest rates will rise. For those on the lookout for a mortgage, it’s certainly a good time to take the plunge. Even if interest rates were to drop further, you would be taking a mortgage at their lowest recorded rates. And a further drop is unprecedented. The overriding likelihood is for interest rates to level or increase, which means shopping for a mortgage right now has to be seen as prudent behaviour. It is of course always sensible to discuss your situation and options with a mortgage broker to help decide what the best options are for your own personal circumstances. Please contact me if you’re in the market for a mortgage and looking for more information on interest rates.

Scott Storace

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