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Why Have Interest Rates Dropped?

Posted by The PerfectHouse Team on Sunday, February 1st, 2015 at 12:03pm.

House for saleThe headlines agree mortgage interest rates have dropped substantially below initial projections. Many who are considering purchasing a home, or moving up to their dream home, might think that they should wait to buy, because rates may continue to fall. Here in Hampton Roads we are seeing an uptick in demand and closings last month compared to December of 2013. This driven in part by the low cost of borrowing money. Prices rose slightly due to this increased demand in most Hampton Roads cities but our market remains fairly well balanced according to REIN statistics.

A recent article on the Economists’ Outlook blog by the National Association of REALTORS® (NAR) provides insight into one major factor in the decline in interest rates, the crude oil price.

“As of January 5, 2015, the U.S. Energy Information Administration (EIA) reported that the price of regular gasoline was $1.99/gallon, the lowest since gas prices peaked to about $ 4/gallon in May 2011.”

 Filling your gas tank has become substantially less expensive here in Hampton Roads in recent months. A welcome change from the close to $4 a gallon that we were paying this time last year. The average US household is projected to save around $550 in 2015.

So what does that have to do with Interest Rates?

NAR explains the correlation like this:

“Lower oil prices mean lower inflation rate, which pushes down mortgage rates.”

Based on Freddie Mac’s weekly mortgage survey as of January 22, 2015, the 30-year fixed rate averaged 3.63% and the 15-year fixed rate averaged 2.93%.

“The decline in oil prices is generally positive to households by way of the gas savings and lower mortgage payments. That savings will boost consumer spending in other areas. But there may be some layoffs in oil-producing states.”

How long will rates stay low?

No one really knows how long oil prices will continue to support low mortgage rates. In a New York Times article, the author points to the fact that “adding hundreds of billions of dollars to consumer spending” could start to have a “counter effect” on rates as the economy continues to strengthen.mortgage rates according to KCM

“If firms start hiring again, and wages increase — that’s when the level of all interest rates in the U.S. would increase.” 

Don’t wait too long

The low interest rates we are currently experiencing are not going to stay around forever. The current projections from Freddie Mac, Fannie Mae, NAR and the Mortgage Bankers Association all agree that interest rateswill increase to between 4.1-4.7% by the end of 2015.

Bottom Line

NAR reports: “At the median home price of $205,300, a 0.75 percentage point drop in mortgage rates will yield savings of about $1,000 annually.”

If you are in a position to buy a home contact The PerfectHouse Team to discuss your needs. We have our finger on the pulse of what’s going on in Hampton Roads Real Estate. Don’t let a delay in purchasing impact your family’s financial future.

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