Can you count on mortgage interest rates to remain low for the next year?
With the country experiencing “Full employment,” Fed rates up
2X in 2017 with more expected increases to come, the stock market flying ever
upward, we see mortgage interest rates drop.
At the beginning of 2017 and through the first quarter,
pretty much every pundit has predicted increases in mortgage rates.
So which way will they go in the rest of 2017 and into 2018?
Is this a good time to buy a house, given the high prices and low interest
rates?
Here are the five key things effecting interest rates. You
might also be able to use an understanding of the trends related to these five
factors to help predict the future:
1.
Bonds are the key: As is obvious by this chart, both 15 and 30
year mortgage interest rates move almost exactly with treasuries. And since
treasuries are basically risk free, the premium for a mortgage is based on
higher risk with 30 year being more risky than z 15 year. As treasuries move,
mortgage rates move.
2.
Inflation matters: Treasuries and other bonds
track very closely with inflation. When investors risk capital, they want a “real”
return. That is, they want to be compensated for lending their money at a rate
something above inflation. To get $1.02 next year for $1.00 invested this year
isn’t smart if the cost of living makes that $1.02 only worth last year’s
$1.00. As you can see on the chart, inflation tracks with treasuries and all
long term bonds.
3.
Investment options: This is a more difficult
item to measure. But consider this. 50 years ago, an investor was probably
deciding between real estate, commodities, stocks, and bonds. Today, that same
investor has dozens of countries around the world offering bonds, and thousands
of companies worldwide offering stocks and bonds. In addition, you are more
likely to buy a property in a foreign land.
With all those options, the buyer should be in control, forcing yields
up. But, the demand has also increased with pension funds, sovereign nations,
and others vying for the same investments, driving prices down. Right now the
demand is keeping yields low
4.
Demand for mortgages: Like any other products,
mortgage companies are subject to the market place supply/demand curve.
Mortgage companies and the mortgage departments at major banks don’t make money
sitting on mortgages, they make money originating or selling mortgages.
Therefore, if consumers aren’t lining up for the product, the price is going to
drop. Right now, demand is very low, as home turnover is light, and refinancing
is extremely low. Thus mortgage companies must drop the price to get the
business.
5.
The Fed: The Federal Reserve can tighten or
loosen money (and thereby affect interest rates) by changing the Fed Funds
Rate, buying or selling Federal Reserve Assets. These two efforts by the Fed
sometimes have immediate affects on other interest rates, but it is the least
important in how it affects mortgages.
These five factors make clear why mortgage interest rates have
remained low, and have even fallen in the last few weeks. What about the
future? Let’s take a quick look at each of the above five factors.
1.
Bond movement seems unlikely. The economy is
still moving up, but in an anemic way. If business picked up to 2.5 or 3%
annual growth, bonds would likely increase yields.
2.
Inflation is non-existent. Even with “full
employment,” there is no pressure on hourly wages. This may be because many in
the labor force are underemployed in hours, skills, or both. There is no
evidence of commodity inflation and oil/energy seems headed lower.
3.
Wealth appears to be growing and the options for
great yields continue to be a chimera. The aging of most populations in the
world and especially in the US would account for much of this wealth growth. It
is also clear that home value increases and the stock market records are
producing huge amounts of wealth that need reinvestment.
4.
Mortgage demand is unlikely to rebound. There
are few existing homes for sale in most US markets and very little new
construction. Most who would refinance to get lower rates have already done
this. Refinancing for cash, consolidation, etc., seems to be at a very low ebb.
That could create more demand in the future if homeowners decide to use some of
the equity they’ve amassed.
5.
The Fed is promising to continue to tighten, and
over time this has to have an effect on all interest rates. The Fed would like
to see inflation at around 2% which would also likely impact current low
interest rates. So far, however, the economy has been very resistant to the Fed’s
efforts.
If you are planning to buy a home or investment property,
and mortgage interest rates are a consideration, you probably have some time to
get the super low rates of the past several years. As this is written, rates
have dropped to 3.625% for 30 year and 3.250%
for 15 year. Those rates are for a jumbo loan and an A+ borrower who is
purchasing for occupancy. If not a purchase, the rate may be 0.125%
higher.
Bill Rayman is more than a
traditional mortgage broker. Bill is a financial consultant with regard to
mortgages. He will help you get the very best mortgage for your specific needs.
He is also extremely resourceful if you have issues that might typically get in
the way of a mortgage. Call Bill today to discuss options. As a mortgage
broker, Bill is only paid if you get your mortgage, so he’s going to work very
hard to insure a positive result.
Bill Rayman Home Mortgages
12121 Wilshire
Boulevard, Suite 350
Los Angeles, CA
90025
Phone: (424)
354-5325
https://www.guaranteedrate.com/loan-expert/billrayman
