You've probably been hearing a lot of interest rates rising for mortgage loans. We've got several clients whose home purchasing power just went down a bit as the interest rate raise put their top mortgage limit down and their desired monthly payment out of reach. While you'll hear much about this being really bad news for the market, rates are still historically very low and, in my opinion, not likely to cause much of a fuss for us. This could however herald a slow down (or cooling of contract terms) in the hot seller's market that we have right now as the audience of home buyer's, particularly for top-priced housing, will shrink and we may not have as much demand.
Our preferred lender, Pete O'Donnell at First Home Mortgage, has given us his over view below...
Currently the average 30 Year Fixed mortgage rate is hovering right around 4.5%, up from roughly 4% in December 2017. While this is a large increase in a small time frame, it’s important to remember that after the 2016 election rates shot up from 3.57% in November to 4.3% by late December. That wasn’t even the largest increase in the last 5 years. From May-June 2013 rates increased from 3.35% to 4.46%!
So you’re probably thinking…how did we get here? How did we see this .5% increase over the last 2 months?
There’s not one singular cause, but I’ll review a few of the likely culprits below…
1) Federal Reserve- While the Fed doesn’t have a direct impact on long term mortgage rates; its policies tend to have a trickle-down effect. After years of increased bond buying and quantitative easing, the Fed has started to unload its massive balance sheet and is flooding the bond market with treasury bills. This increased supply of treasuries is driving the price down, and increasing the yield (Bond price and yield have an inverse relationship). Mortgage rates tend to follow the 10 Year Treasury yield and we’ve see the 10 year yield rise from 2.4% in Mid-December to 2.9% this week.
2) Inflation- For the last few years Janet Yellen and the Fed have been warning about rising inflation, but most economic indicators showed no reason to be concerned. That has changed in the last few months as we’ve seen GDP growth over 3% in the last few quarters, coupled with 17 year low unemployment levels (currently 4.1%). What really rang the inflation alarm was the January Labor report which showed average hourly earnings up 2.9% from the prior year. For the last few years we’ve seen unemployment decline, but wage growth was relatively flat. This new trend of declining unemployment and increased earnings has signaled inflation may be taking off sooner than expected.
3) Stock Market- In late January and early February the stock market saw some record daily losses but it’s probably not as bad as you think. While Monday the 5th was the Dow’s single worst day decline in history, percentage-wise, it was only a 5% drop from its 12 month high, not even registering an official “correction”. While typically there’s an inverse relationship between the stock and bond market, this hasn’t been the case as mortgage rates continued to climb as the Dow fell.
So where do we go from here? Probably up. Most economists are projecting rates to continue to rise the remainder of 2018 and into 2019. My advice is to get pre-approved as soon as possible so you can get into your next home before we see interest rates cross the 5% barrier, which we have not seen since 2011.