Grand Forks bankers say economy is strong enough to handle rising interest rates – Grand Forks Herald

GRAND FORKS — Chris Wolf sees the world of finance through a unique lens. He readily admits that he is not an economist but sees trends in the industry from his perspective of working with clients in the region.

Chris Wolf

Wolf is Market President of the North Valley of Alerus, a chain of financial institutions headquartered in Grand Forks. If there’s a phrase to describe what he sees in the region, it’s that the region is economically strong. This is a good starting position, especially in anticipation of rising interest rates.

At the time of this writing, he said that “interest rates are still at low levels.” But what happens when they level up?

The region would still be in good shape – as long as interest rates do not rise too quickly.

“That would lead to an increase in costs for businesses and individuals, which, if done too quickly, would result in a slowdown or reduction in economic activity,” Wolf said.

“The economy in this region was strong. If an economy is strong, you would expect interest rates to rise as inflation rises. The economy can take a certain amount of it and still be strong. The balance is that they don’t want to raise rates so fast that it cools the economy.”

The good news is that interest rates tend to rise slowly.

Sunil Swami, chief investment officer at Alerus, said higher interest rates have other costs, such as increased financing costs, which can lead to compressed valuations of stocks and real estate. “However,” he said, “if interest rates rise due to economic growth, it implies that the economy is strong enough to absorb higher interest rates, which is positive.”

The geopolitical climate, including the Russian invasion of Ukraine, may affect interest rate decision-making here at home.

“For example, higher oil prices may increase inflation, which could prompt the Fed to hike rates more than usual,” Swami said, noting that the market expects about six rate hikes of about 0.25% each in 2022 through the end of February .

Debbie Albert, financial advisor at TrueStone Wealth Management in Grand Forks, said she expects interest rates to rise.

“We think interest rates are likely to go up,” she said. “We’ve seen interest rates very low for so long that it’s almost time they normalized. And that’s good and bad.”

On the plus side, she said, it’s good for those who save their pennies, those who use interest-bearing accounts in general — savings deposits, money market accounts, certificates of deposit — because they’ve seen such a loss in their returns from the diversification of these types of investments.

“So that’s a plus for this market segment,” Albert said.

It’s also good for retirees and the elderly who use their investments for retirement income, who are particularly affected by low interest rates.

As an example, she said if someone had $100,000 at 4.5%, they would make $4,500. If it goes down one point, that’s a hundred dollars.

“You feel it,” she says. “This is real money for this market sector.”

With increased rates, they get this money back.

Albert said if interest rates rise, there could be an impact on mortgages as homeowners may see their monthly payment increase.

“Those individuals who have had adjustable rate mortgages in the past may be surprised to see the mortgage rate increase due to the fall in interest rates. It might slow down because it’s getting more expensive now,” she said. “The sector of the market that carries your higher mortgage balances is usually your first home buyers. They have higher mortgage balances – those in their late 20s and early 30s who are just starting their home. That’s the area that’s likely to be hit the hardest. On the other hand, those who are on the fence looking at market prices and wanting to buy a house could get into the market quicker.”

Donovan Schumacher, mortgage banker and Red River Valley sales manager at Alerus, said the federal government is buying mortgage-backed securities and reinvesting its dividends back into the market in the second quarter of 2020, which drove interest rates down and kept them low.

“The government then announced that it would stop investing its dividends and eventually start selling many of the mortgage-backed securities it had bought,” he said. “This triggered the slow rise in interest rates that started in late Q3 2021 and has continued to this day.

He said rates would most likely settle at 4% to 4.5% for 30-year fixed-rate mortgages and 3.125% to 3.5% for 15-year fixed-rate mortgages, “but there’s still uncertainty about where rates are going. Adjustable rate mortgages were comparable to fixed rates, so most people chose fixed rate mortgages to avoid potential interest rate fluctuations.”

When inflation is high, he said, so are mortgage rates; When inflation comes down, mortgage rates should also calm down.

He said there is something people can do to protect themselves by making sure they have good credit, something that is achieved over time and not achieved all at once.

“Over the last 10 years, the average interest rate on 30-year mortgages has been in the 4.125% to 4.25% range,” Schumacher said. “In order to get the best interest rates, it is very important to take good care of your creditworthiness. Credit scores affect multiple aspects of home buying, from interest rates to home insurance costs.”

Wolf, using his personalized lens, said he wasn’t overly concerned about rising rates as long as they were slow and steady. Construction, manufacturing and other industries continue to develop and grow in the region – there is “a lot of activity, a lot of projects,” he said – all signs of a healthy economic climate.

“A rising interest rate environment can still be healthy for the economy in this region as long as interest rates don’t rise too quickly,” he said. “Our customer base plans to grow their business and invest in this region and we expect to continue doing so into 2022.”

This story was published in this month’s issue of Prairie Business, a free publication from Forum Communications Co. covering business trends in the Dakotas and western Minnesota. Prairie Business is located in Grand Forks.