Talking about the latest reports on mortgage rates and what the Federal Reserve raising their benchmark rate will mean for rates!
Mortgage Rates This Week
Freddie Mac reported:
- 30-year fixed-rate mortgages averaged 3.93% with an average 0.5 point
- This is down from last week when it averaged 3.94%
- Last year at this time, 30-year fixed-rate mortgages averaged 4.16%
- 15-year fixed-rate mortgages averaged 3.36% with an average 0.5 point
- This is the same as last week
- Last year at this time, 15-year fixed-rate mortgages averaged 3.37%
Len Kiefer, Deputy Chief Economist at Freddie Mac said:
As widely expected, the Fed increased the federal funds target rate this week for the third time in 2017. The market had already priced in the rate hike so long term interest rates, including mortgage rates hardly moved. Mortgage rates held relatively flat across the board, with the 30-year fixed mortgage rate inching down 1 basis point to 3.93 percent in this week’s survey. Mortgage rates have been in a holding pattern for the fourth quarter, remaining within a 10 basis point range since October.
No big changes for the rates reported by Freddie but we may not have seen all of the effects from the Fed raising their benchmark rate. I will discuss this after looking at what the MBA reported this week…
The Mortgage Bankers Association reported:
Mortgage applications decreased 2.3 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending December 8, 2017.
The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($424,100 or less) increased to 4.20% from 4.19%, with points decreasing to 0.39 from 0.40 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans.
The average contract interest rate for 30-year fixed-rate mortgages with jumbo loan balances (greater than $424,100) decreased to 4.11% from 4.16%, with points unchanged at 0.28 (including the origination fee) for 80 percent LTV loans.
The average contract interest rate for 15-year fixed-rate mortgages increased to its highest level since March 2017, 3.61%, from 3.59%, with points decreasing to 0.44 from 0.48 (including the origination fee) for 80 percent LTV loans.
Again, no huge changes. But what can we expect to happen after the Fed made their announcement:
In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 1-1/4 to 1‑1/2 percent. The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation.
The Federal Reserve doesn’t determine mortgage rates but it sets the interest rate that financial institutions charge to loan to each other. The cost of this is eventually passed on to consumers like you and me…
The rate we are concerned about is the Federal Funds Rate because it is important in how it affects mortgage rates. If you read about the Federal Reserve increasing rates, they are talking this rate. So when this rate increases, it is likely that mortgage rates will increase.
The reason the Fed adjusts the Federal Funds Rate is to either heat up or cool down the economy.
If the Fed lowers their rate, it encourages banks to make borrowing cheaper and encourage spending. If the Fed raises their rate, it does the opposite. It also causes banks to be less enthusiastic to lend and to sit on their money.
If the Fed raises or lowers their rate, it means the banks will change their prime rate. This normally happens a few days or so after the Fed makes a change. Mortgage rates are benchmarked against the prime rate not the Fed’s rate.
The Fed has 2 mandates: keep prices stable and maximize employment. In her last press conference as Fed Chairperson, Janet Yellen said this will “sustain a strong labor market while fostering a return of inflation to 2 percent.”
Right now, inflation is low but the Fed may be raising their benchmark rate so they will be able to do something IF the economy hits the skids. The Fed usually raises it’s rate to fight inflation but we are well below their target of 2% inflation.
However, the Fed is saying they should increase rates 3 times in 2018. We may see mortgage rates increase in 2018 if the Fed does raise rates 3 times in 2018.
2 wild cards in this are what effect the tax reform will have on the economy and what will happen as the Fed starts shrinking their holdings of mortgage-backed securities. The Fed does not think the tax cut plan will boost the economy much.
The Fed is forecasting the economy will grow at 2.5% in 2018 which is better than their last forecast of 2.1% growth back in September. Yellen said this forecast was adjusted to include the effects of the tax cut and the tax cut was discussed before they decided to raise rates.
Interesting that the tax cut plan is going to add to our already HUGE deficit and Yellen said in the FOMC press conference that she is concerned about the U.S. debt situation. She thinks adding to the debt will limit our options if or when the economy hits another bump in the road.
Remember, always hope for the best but plan for the worst. So what will happen IF we do see mortgage waits increase in the coming year?
Why Waiting to Buy Could Be Costly
I recently wrote about how CoreLogic said that over the past year, U.S. house prices have increased by 7.0%. The good news for home buyers is that mortgage rates have remained at historically low levels.
What if home prices and mortgage rates were to increase in 2018?
Well, the Mortgage Bankers Association (MBA), Freddie Mac, and Fannie Mae are all predicting that mortgage rates will increase by this time next year. And you have read some of the predictions that home prices are also going to keep increasing.
For example, CoreLogic is saying that home prices will increase 4.7% in the coming year. Look at this chart showing the impact of rising mortgage rates and home prices:
Obviously waiting to buy a home could prove to be costly. I know many people in the Anderson area are not going to be buying a $250,000 home but the effect is the same no matter how much home you buy.
Check out this chart showing how home prices have increased over the past year according the the latest FHFA Quarterly Home Price Index:
It is very likely we will see home prices continue to increase. According to FHFA, we have seen home prices increase 7.2% over the last year…
And odds are, we are going to see the Fed raise their rate and then it will cause mortgage rates to increase.
Which will be a double whammy on monthly mortgage payments!
Higher home price and mortgage rates have a dramatic effect on your monthly payment and how much you will spend overall. If you have any questions about buying a home in the Anderson area, please contact me!