President Trump’s “America First” trade policies have sparked the Federal Reserve Board to lower interest rates, which could benefit Chicago home buyers and families seeking to refinance.
Trump, who is counting on a strong economy as he campaigns for reelection next year, has pushed the Federal Reserve to immediately start cutting interest rates to undo what he sees as the damage from four unnecessary Fed rate hikes last year.
In an abrupt policy shift on July 31st, the Federal Reserve cut its benchmark funds rate by a quarter of 1 percentage point to a range of 2% to 2.25%. It was the first reduction since 2008, when the Fed cut rates to essential zero in the wake of the Great Recession’s financial crisis.
“The outlook for the U.S. economy remains favorable, and this action is designed to support that outlook,” said Fed Chairman Jerome Powell. “It is intended to ensure against downside risks from weak global growth and trade policy uncertainty, and to help offset the effects these factors are currently having on the economy.”
The immediate result of the Fed rate cut was a decline in the 10-year Treasury bond rate to 1.85% from 1.89%. Experts say the lower 10-year bond rate will put major pressure on long-term home-loan interest rates eventually resulting a quarter of 1 percentage point decrease.
On August 1st, benchmark 30-year fixed mortgage rates averaged 3.75% nationwide, unchanged from a week earlier, reported Freddie Mac’s Primary Mortgage Market Survey. A year ago, the 30-year fixed loan average was 4.60%. On August 2nd, Chicago-area lenders were charging 3.756% to 3.940%, reported rateSeeker.com.
“Mortgage rates have essentially stabilized over the last two months, which reflects the recovery and improvement in the economy from the malaise earlier in the year,” said Sam Khater, Freddie Mac’s chief economist. “Low mortgage rates, a tight labor market and high consumer confidence should lead to improvement in home sales in late summer and early fall.”
An optimistic forecast from the National Association of Home Builders said: “The Fed’s approach is a net positive for future housing demand and home construction.” While additional rate cuts in the near term are not guaranteed, the NAHB forecast includes a prediction for an additional quarter of 1 percentage point reduction in the Fed funds rate in late 2019.
So, what do all these numbers mean to prospective house hunters and homeowners seeking to refinance? The window of opportunity for locking in a near record-low 3.5% or lower 30-year fixed mortgage rate in late summer and autumn of 2019 is wide open.
A benchmark 3.5% rate would be the lowest mortgage rates have hit since November 21, 2012, when they tumbled to a historical rock-bottom of 3.31%, reported Freddie Mac.
Interest-Rate History Lesson
Just how affordable is a 3.5% or lower mortgage rate? Twenty years ago—in August of 1999—when many of today’s Millennial borrowers were in grammar school, lenders were quoting 8.15% on a 30-year fixed mortgage.
However, to really appreciate today’s historically low interest rates, housing experts say home buyers need only to look at what banks and mortgage lenders where charging more than three decades ago, in the early 1980s.
According to Freddie Mac, benchmark 30-year mortgage rates peaked at a whopping 18.45% in October of 1981 during the Great Recession of the 1980s. Rates fell below 10% in April of 1986, and then bounced in the 9%-to-10% range during the balance of the 1980s.
Archives of the now-defunct Federal Housing Finance Board show long-term mortgage rates were relatively affordable five decades ago at 5.81% to 5.94% between 1963 and 1965.
In 1966 and 1967, borrowers paid an average of 6.3% to 6.4% In the 1960s, rates last dipped below 6.5% in January of 1968, when the national average hit 6.41%. Between 1971 and 1977, the now-defunct Illinois Usury Law held rates in the 7.6%-to-9% range.
For more housing news, visit www.dondebat.biz. Don DeBat is co-author of “Escaping Condo Jail,” the ultimate survival guide for condominium living. Visit www.escapingcondojail.com.