Interest is the cost the borrower pays to the lender for the benefit of using the principal. Since real estate is very expensive in Los Angeles, current entry-level prices are about $500,000 to $600,000 and go up to 100M, the majority of transactions are with loans. Depending on the year you can expect loans to be anywhere from 60% – 80% of property transactions in Los Angeles (more cash purchases in down markets from investor activity, and more loan purchases in up markets from retail buyers). Interest rates fluctuate daily and move according to the global economy, the US economy, and the stock and bond market. Interest Rates are very hard to predict!
Fed Chair Paul Volker had the courage to raise interest rates to an unheard of 21.5% in 1981 to snap the US out of hyperinflation which was 15% in 1980 and dropped to 3% by 1983
Mortgage Brokers and Lenders always watch the 10-year treasury market and Fed Policy meetings for insights into the direction of interest rates. A good lender should be able to offer some insights to buyers about the current interest rates and where they are heading. The 10-Year Treasury index is basically the stock market’s prediction on where interest rates are going. Sometimes the market is right and sometimes the market is wrong. Even if the market doesn’t decide interest rates- the Fed does, it is good to know what the market thinks because the Fed certainly pays attention to people’s expectations. The Fed sets interest rates. Whoever is the current Fed Chair (Jerome Powell right now) has a huge influence on policy decisions. The fed has 10 members total so the Chair isn’t the only one who votes but they have the most influence. Right now we are in the midst of a rate-cutting cycle. The Fed’s dual mandate is maximum employment and stable prices (mainly this is inflation which they like to see at 2%). Adjusting the interest rate is one of their main tools for accepting the monetary policy. Some of their other tactics are Bond Buying, Money Creation (governments have fiat power to print money), and Credit creation (the fed sets the bank’s reserve ratios).
Interest rates are expressed as a percentage. The Interest Rates are currently near all-time lows with 30 years fixed at 3.5% interest rate. In 2019, The Fed has been keeping a close eye on the economy, the current trade war with China and global manufacturing slowdown have them worried of a potential economic downturn in the US. Unemployment is at an all time low at 3.5% and inflation is healthy at 2%, and GDP while slowing down from 4% in 2018 is still robust. The graph below was compiled from Historic 30 Year Fixed Rate Mortgage Data provided by FreddieMac.