Since low inflation has been in the news lately, mainly in reference to increasing social security payments for 2014. An increase caused by inflation of 1.7% is due on the January 2015 checks.
Thought it might be interesting to look at the interest rates and housing costs plotted against the consumer price index to see what has happened over the past few years.
I choose to start at 2006; the reason is 2006 was the peak home sales in Yellowstone County. Since that year was peak activity it indicates at what price people were willing buy and the monthly payments incurred to purchase at that time.
This first graph is showing the consumer price index plotted against the Freddie Mac 30 year interest rate commitment. The first anomaly that jumps out, a declining interest rate with and increasing cost environment. What that indicates is someone is willing to accept there is less risk of losing purchasing power on their money caused by prices going up, in comparison to the interest they will receive on the Money that is being lent. So from 2006 to October of 2014 the interest rate has dropped by 38.85% in cost, yet the consumer price index has gone up 19.2%. This would indicate if you wished to receive the same purchasing power as in 2006, the interest rate would be 7.64% or 48.69% higher than it is today. That brings some comments on the Federal Reserve.
It is important to note never bet against the entity that has the unlimited power to print money i.e. the Federal Reserve.
With the Federal Reserve’s printing of money and buying mortgage back securities you have an outside force distorting “normal” market reactions. Although the Federal Reserve has “ended” it program of buying MBS bonds (it holds approximately 17% of the outstanding MBS or approximately 1.7 Trillion dollars, all purchased since 2008) the Federal Reserve stated that it would continually invest the proceeds of any principal reduction back into the MBS market. So the fed’s out sized influence on the mortgage market will continue until the Fed decides it reduce it holdings, then you might want to Katie bar the doors about where home mortgage rate may go.
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