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Successful author of Money in the Streets and successful mortgage expert, Barry Habib gave a great presentation to explain interest rates, inflation, recession, housing bubbles and what they mean to consumers who are looking to become homeowners.
According to Habib, we need to understand what drives prices — supply and demand. “The demand side of housing is going to be influenced greatly by interest rates so if we want to understand what’s going to drive housing we want to understand
the direction of interest rates and if we want to understand interest rates we need to know what is actually driving
them,” says Barry Habib, Guaranteed Rate Affinity.
Many consumers mistakenly believe that what drives mortgage rates is the Federal Government. “The FED influences a lot
of things — personal loans, credit card loans, car loans, and home equity lines of credit, and business loans but not when it comes to mortgage rates. When the FED hikes rates or cuts rates, mortgage rates do not respond.
In fact, they oftentimes respond in the opposite direction. For example, in the last two and a half months the fed’s hiked rates one and a half percent so the feds have gone up a hundred one and a half percent but mortgage rates have come down by one percent so we know it’s not the FED,” explains Habib.
Inflation is what drives mortgage rates. For example, a homeowner makes a monthly payment on their mortgage that is fixed over a period of 15 to 30 years. However, the cost of those non-fixed items — groceries, the heating bill, clothing, gas, etc. — now cost more as inflation is driving prices a little bit higher making some things cost more “so that $2,000 that I gave you
doesn’t feel like $2,000 because it doesn’t buy as much as it used to.”
What’s happening is inflation is causing the buying power over time to erode. When inflation is higher, buying power is going to be eroded more rapidly. Your groceries or consumer products may have cost $2,000 a month a year ago, but today because of inflation, it costs $2,300.
“When inflation goes up mortgage rates go up when inflation comes down mortgage rates come down pretty simple and that’s a very important foundation,” says Habib.
