Mortgage Rates Where are they going to?

So far, 2016 has held an endless number of shockers so far and we aren’t even into the end of the quarter! So to say the same holds true with the interest rate on mortgages goes without saying.  Most economists had expected rates on mortgages to generally be higher than they’re today. Instead, rates are near three-year lows for a 30-year conforming fixed-rate loan. In 2015, 86% of buyers financed their home purchase with a mortgage. So mortgage rates-where they are now and where they’re going-have a vast influence on what buyers are going to do and the stress they will experience through the entire purchasing process. The extension of low rates continues to be positive for most buyers, who benefit from increased buying power.

Rate roller coaster. This year hasn’t just seen rates decrease. Yes, in six of the first nine weeks of this year, rates declined. However the most recent two weeks have experienced rates go up. The daily volatility is even more extreme: 23 down days, 17 up days, and five flat days. This really is head-spinning stuff. The average daily difference in the average 30-year fixed-rate mortgage thus far this current year is 3 basis points. (Remember, one basis point is 0.01 percentage points. For example, if a rate falls from 3.5% to 3.47%, it’s declined three basis points, or 0.03 percentage points.)Even as we get into the peak spring buying season, it’ll be even more critical to follow the movements of mortgage rates. Buyers who think those rates aren’t moving might have a rude awakening when they realize the recent trend upward. Since Feb. 11, the typical 30-year fixed interest rate has increased almost 20 basis points. That results in a reduction of purchasing power by over 2%.

For potential buyers, these rate movements could be nerve-wracking. A 10 basis-point alteration in a rate on a mortgage, with all additional factors remaining the same, will produce a 1.2% difference on the monthly payment. Of course that affects not only your monthly budget, but additionally your debt-to-income ratio, which is actually a critical factor in qualifying to get a mortgage.

If you are keeping score, that means the mortgage market gave buyers about 6% more buying power as rates fell, but since then the market has taken back nearly 2% in purchasing power. Buyers are still up, but there’s a lot of time left on the clock in this year’s buying season.

Tapping the very best predictions for rates
OK, so let’s get it out of the way right now: There’s no clear consensus on where rates on mortgages may go from here.

Three scenarios emerge:
The first path sees the economy as hobbled by global economic weakness along with the decline in the price of oil. As oil declined in January and early February, the stock market followed, and global money sought refuge in the dollar and U.S. Treasury bonds. As demand for bonds increases, so does their price, and rates on mortgages move in the exact opposite direction.

This more negative look at the economy sets a low expectation for rates on mortgages, particularly for this current year. In this scenario, the global economy doesn’t improve but also doesn’t get worse, so mortgage rates remain about where they are now (around 3.8%) for the rest of the year. However, as the first nine weeks of this year show, rates are more likely to see a substantial amount of daily and weekly movement according to economic data releases and Federal Reserve meetings.
According to the second scenario, rates and financial markets have overreacted to the global economic concerns, but the global weakness will limit the growth we can see in 2016. This moderate view of growth would see the average 30-year fixed interest rate get back above 4% by the third quarter and reach 4.2% by year-end.
The final scenario also assumes that the financial markets overreacted to negative news at the start of the year. However this storyline also sees inflation heating up quicker than expected, causing the Fed to act more aggressively on short-term rates. This view would see rates reach at the least 4.5% by the end of 2016 and potentially even 5.5% in 2017.

These aren’t really the only possible scenarios, but at this point we think they represent the most probable outcomes. Economists-including myself-have been consistently wrong about rates on mortgages for many years, since they are influenced by many economic forces that are difficult to measure and model. But by looking across these different perspectives, you will observe a logical range that more than likely includes what rates will do.

Sobering implications of rate forecastsIf you prefer a single forecast, take the average of these scenarios. This view would see the 30-year fixed conforming rate reaching 4.22% by the end of this year. That would be almost 50 basis points above where we are today, giving credence to moving fast and exploring options like rate locks along the way.
Once we do reach 4.22%, the mortgage market will have reclaimed all of the buying power given out at the beginning of the year and would remove yet another 1.5% of buying power.

Then taking a first look at 2017 while using the average of these scenarios, the 30-year fixed conforming rate would most likely reach 4.89%.

Adding the impact of home price appreciation to these expected mortgage rate increases leaves the sobering perspective that it will cost 20% more by the end of 2017 to purchase a typical home in the U.S. with a mortgage, in comparison with the incredible bargains today.

And yes, we knew that the moment we wrote this, it’s now bound to be wrong. But we promise to keep up to date with what actual rates are doing along with what the experts predict for the road ahead, so you can plan accordingly. And if you have been considering purchasing a new home, now may be the time to get started. We are always available at 813-300-7116 or simply click here and we will be in touch.