As rates continue to move higher there are two things on every mortgage professional’s mind to help and protect their borrowers. Lock and extend.
We are in the most pronounced rising rate environment we’ve seen since before the 2008 financial crash. Here at Movement, like other lenders, average mortgage rates have increased about 65 basis points since the Trump election. That’s been a boon for equities but a bit painful for the mortgage market. The 10 year Treasury note has moved from 1.75 to 2.59. (see chart below) If there have been any stragglers expecting rates to pivot the other direction, this week must have been a wake-up call.
The trend should prompt buyers to lock rates and loan officers to extend rates that may soon expire. The days of floating a rate, knowing a drift lower is always around the corner are gone. A mix of economic news, political trends and monetary policy are all pushing rates in the same direction, higher. Fed makes its move
The latest development came this week when the Federal Reserve’s Open Market Committee increased benchmark interest rates for just the second time in 10 years, increasing its target range from a range of 0.25 percent to 0.5 percent to 0.5 percent to 0.75 percent. More importantly, Fed Chair Janet Yellen said she expects the Fed will hike rates three more times in 2017, revising earlier forecasts which called for just two hikes next year.
Why? Yellen told the financial press a low unemployment rate (4.6%) combined with overall economic health is expected to meet up with President-elect Donald Trump’s plans for tax cuts and increased infrastructure spending. That’s a mixture that will likely push inflation closer to the Federal Reserve’s two percent target or higher. Yellen also raised questions about the effectiveness of more government spending at a time when employment was already near full. It’s enough to prompt a dovish Fed to suddenly become more hawkish.
Fannie Mae Economist Doug Duncan released a statement this week forecasting future rate hikes will largely depend on how Trump’s policies unfold. “Much of the upbeat financial data, including the jumps in interest rates, the dollar and equity prices, are largely due to the anticipation of stronger economic growth from suggested fiscal stimulus and deregulation from the new administration and Congress,” he said. “The Fed will likely be in wait-and-see mode given this substantial policy uncertainty, and we view this prudency a virtue.”
A history lesson
Now, while remaining vigilant, let’s also keep this in perspective. Even the quick rise in rates (which is probably long overdue) hasn’t removed us from a low interest rate environment in historical context. Most homebuyers today are locking rates on a 30-year fixed loan somewhere around 4.5 percent. That’s well below average and nowhere near the mid- to high teen interest rates we saw in the early 1980s — or even the 6 percent to 8 percent rates we saw in the 1990s and 2000s.
Another positive to remember for the housing market: Rising rates today are fueled by expectations of more jobs, better wages and lower taxes in the near future. More jobs, higher wages and lower taxes would provide a nice boost to the purchase mortgage market as more Americans would feel confident in taking on homeownership.
Inventory and first-time buyers
There are also some red flags. Rising interest rates could create affordability problems for first-time homebuyers. Already faced with low inventory and rising home prices, higher interest rates may price some buyers out of the market. Rising rates could also slow the pace of existing homeowners moving up to a larger home, which will only exacerbate the inventory shortages for new homebuyers in some markets.
The solution? Let’s hope builders finally begin to address the lack of first-time homebuyer inventory. Post recession, homebuilders have been slow to build new stock in lower-priced starter home communities. If the economy continues to grow, and interest rates return to more normal levels, there may finally be incentive to build more affordable starter homes for Millennials who are forming families and preparing to own their own basements for kids to live in.