An Update About Mortgage Rates

It’s been a surprising year for mortgage rates.

At this time one year ago, 30-year mortgage rates had just jumped past 4% following the presidential election. Analysts were calling for rates in the mid-4s or even 5% by now.

Those predictions, it turns out, were dead wrong.

Not only did rates fail to rise as 2017 rolled on, they actually dropped. According to mortgage agency Freddie Mac, the average 30-year rate is down 40 basis points (0.40%) from its March 2017 high. This translates to savings of nearly $60 per month on a $250,000 mortgage.

The question everyone is asking, though, is, “Will mortgage rates hold through December and beyond?”

So far they have.  As expected the Fed raised the overnight cost of money raised the 0.25 percent to a band of 1.25 percent-1.50 percent.

Movement of the Fed rate — up or down — can put pressure on mortgage interest rates, which often follow the lead of the 10-year Treasury note aka the “long bond.”

The immediate response in long-term bond and mortgage markets was down. Slightly, but down.

How can this be so? The immediate reasons are these:

  1. The Fed’s forecast and statement accompanying the rate hike were peaceful. Many had feared an acceleration in future hikes.
  2. Inflation is still low, and that’s the primary concern in long-term markets. This morning’s CPI report showed core inflation at 1.7 percent in the last year, below economists’ forecasts, and significantly below the Fed’s 2 percent target.
  3. The European Central bank and Bank of Japan are holding their long-term bond yields far below ours. The German 10-year yield today is 0.317 percent, and Japan’s 0.049 percent. Global investors find our 2.37 percent yield very attractive no matter what the Fed does.

You can’t talk about mortgage rates without also mentioning inflation.

Low inflation is perhaps the best explanation for today’s low mortgage rates — despite a rallying stock market and economy.

Inflation has been surprisingly low. The five years preceding October 2017 saw a rate of “core” inflation (excluding food and energy) of 1.58% per year, falling short of the Fed’s goal of 2%.

Low inflation in times of recession are expected. But why hasn’t inflation budged during solid “rebound” years?

For comparison, prices during the five years preceding October 2008 saw a robust 2.19% average increase per year.

Not even the Fed fully knows why inflation hasn’t picked up to those levels. To date, it has explained it away as “transitory.” Meaning, whatever is causing ultra-stable prices will soon go away.

We won’t try to answer the question here, but consumers should note that mortgage rates are on borrowed time. Mortgage rate shoppers are benefiting from the current low-inflation anomaly. 

So what should we expect in 2018?

No one knows, but what is certain is that interest rates are on shaky ground.

The Federal Reserve is about to get a new boss, historic tax reform is becoming law, inflation is in uncharted territory…there is an unlimited number of directions mortgage rates could go.

About the only homeowner or home buyer not interested in mortgage rates are those that have already locked in. So the real question is, when will you lock in these unexpected rates?