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Who controls interest rates? Learn what has changed in 2017 and how it affects homebuyers

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The Federal Reserve, aka the FED, ended all of its intervention in interest rates at the end of 2016. The big question now is: What will interest rates do? This is an important question because interest rates have the biggest impact on monthly home-loan payments — and your buying power.

Since September 2008, and the beginning of the FED intervention, Americans haven’t had to think much about home-loan interest rates. Rates had gone from low to lower, as rates of 6.5 percent dropped to below 4 percent. And as long as the FED intervened, few people thought much about interest rates. That’s all changed now.

For the first time since late 2008, when it comes to interest rates, real estate is in an area of the “un- known.” On Oahu, people are used to factoring in relatively consistent price increases. Now, with interest rates determined solely by the “market,” there are two variables to monitor: prices and interest rates. So, what is this “market” that determines home loan rates?

Long-term interest rates, where home-loan rates live, are deter- mined by the “return” on the 10-year Treasury bond — commonly referred to as the “10-year Treasury.” The 10-year Treasury is issued by the Federal Reserve to raise money for the U.S. Government. Ten-year Treasuries are purchased by other countries, large international banks and, more recently, by very large corporations.

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Since the 10-year Treasury is a bond, the return on it is fixed at the time of sale. Because the rate is fixed, the higher the bond sales price is, the lower the return rate. Home-loan interest rates are “pegged” to this re- turn rate. When the demand for the 10-year Treasury is high, the return rate becomes lower. Therefore, the higher the sales price of the 10-year Treasury, the lower home-loan interest rates will be.

Here is where “the unknown” comes into play. The sales price for the 10-year Treasury is deter- mined by the demand for it. Higher demand means higher sales prices, and higher sales prices equal lower return rates. That translates to lower home-loan interest rates. If demand remains high for the 10-year Treasury, interest rates will remain low. If demand falls, interest rates rise.

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So what drives demand for the 10- year Treasury? The easiest answer is “safety.” In very large amounts, cash becomes a commodity that needs to be stored somewhere very safe and where there is a reason- able return. In recent years, the 10- year Treasury has been that parking stall for other countries, large inter-national banks and very large corporations. We are seeing this “flight to safety” now, therefore interest rates have not moved up very much so far this year.

One way to look at it is, as long as the U.S. is considered a safer investment, its long-term interest rates will likely remain stable. However, this circumstance is subject to change. Home-loan rates were around 6.5 percent just before the Federal intervention in 2008, and that rate was determined by the market for the 10-year Treasury at that time. Therefore, going forward, home-loan interest rates will be determined by this 10-year Treasury “market.”

A great way to deal with the un- known is to not wait — find out more about what the future holds. Join Locations at one of its free Future Homeowner Seminars (see below).

Wednesday, May 17
Pearl Country Club, 5:30 p.m.
Saturday, May 20
Locations’ Diamond Head Office, 9:30 a.m.
Visit to register.

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