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English in Need of Translation (Posted January 4, 2016)

George Bernard Shaw is credited with having written the line, “England and America are two countries divided by a common language.”  In other words, while speaking the same language, quite often two people can’t understand a word the other is saying.  That, I fear, applies to us in the mortgage world more than we would like to admit.  We get all nerdy and start talking about debt-to-income ratios and disclosures, all the while the person with whom we’re speaking zones out and starts thinking, “Today’s Tuesday, right?  It’s two-for-one tacos down at Felipe’s for lunch!”  Tacos beat nerdy mortgage talk every day of the week and twice on Tuesdays. 

These past few months, there’s no way you could turn on the radio or television and NOT hear or see someone talking about the Fed and whether they were going to raise the funds rate.  Regardless of the news station, they bring on “the expert” to explain what this means to you and me . . . and that’s when he or she might as well be speaking Swahili with a Ukrainian accent.  Sure, the words are all in English, but they’re arranged in sentences that sound like this: “Cats explode microwaving pool cues on leather Sundays.”  You’re not sure if you should run for your life or buy stock in these furiously awesome felines.  Before you do anything hasty, take two more minutes and read on – I promise to make sense of all this for you.

What the Fed does with the funds rate DOES have an effect on all of us, sure, but it’s not as severe as you might think:

•  From May 2004 to July 2007, the Fed funds rate moved up from 1.0% to 5.25% - sounds pretty dire, right?
•  In that same period, the mortgage rate rose from – are you ready for this – 6% to 6.75%

As I write this, the Fed funds rate is .5%, and the projections by the Fed indicate that by September 2017, that rate will be at 2.6% – that’s about half of the Fed’s increase in the May 2004 to July 2007 period indicated above.  In the words of David M. Blitzer, Managing Director and Chairman of the Index Committee at S&P Dow Jones Indices (he must have really big business cards to fit that title on them), “These data suggest that potential home buyers need not fear runaway mortgage interest rates.”


While we all want to give Davey a nice warm hug, there is a bit of urgency that I would like to inject into the conversation here – and I’ll keep it in plain English, I promise.  Over the past year, home prices have averaged an increase of about 5%, which means a $200,000 house is now selling for $210,000 – and the prices are projected to increase by another 5% this coming year.  So, according to Mr. Blitzer, a potential homebuyer doesn’t have to buy TODAY to make sure the rates are reasonable, but they should start looking NOW.  Every $10,000 increase in a 30-year mortgage, is about a $50/month increase in the payment – that’s $600/year, which is a lot of tacos (twice as many on Tuesday)!

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