Countless articles have headlined the almost certain increase in home mortgage interest rates that would follow the increase in the Fed Funds Rate.
The increase has come from the Fed, but mortgage interest rates have actually fallen. How can that be, and what does it portend for the future.
Very generally speaking, a move by the Fed will carry a similar move by all other interest sensitive sectors. However, even when the Fed does drive those changes, they don’t necessarily happen simultaneously. In the late 2015 case, you could easily point to earlier upward pressure on mortgage rates that anticipated a coming Fed move. When the actual news came one could argue that the mortgage rates got out ahead of the Fed, and there was a pullback.
You have also seen that banks did not start offering better savings rates. Only now, a few weeks later, do you see some potential moves to offer savers a better deal.
If we accept the above arguments the pundits will begin to speculate on the next Fed move upwards, and this could start to create upward pressure again on the mortgage rates. Or not. Here is the other aspect of the equation that can’t be ignored.
Mortgage interest rates are set based on the bond rates, not the Fed. Bond investors do not necessarily move out of bonds (sending interest rates higher) based on a Fed increase. Bond buyers need to see some other asset that offers a better combination of return and security in order to switch. Other asset classes at this point are not giving anyone much of a reason to switch. On the contrary, there is enough fear in the market overall to push more traders into the security of bond, even at lower interest rates.
Where does all of that leave us going into 2016. Most pundits are forecasting that the Fed will raise four times in 2016 by ¼ point each time. If mortgage rates follow, we are likely to be looking at around 5% in December 2016 compared to 4% now on a 30 year fixed. Mortgage rates are unlikely to move faster than that, and the Fed may not make four increases. So, call the range 4% – 5% in the next 12 months or so.
That could dampen real estate prices a bit as marginal buyers are not able to afford higher monthly payments. On the other hand, even 5% interest rates will be historically very, very low, as you can note on the chart at the top of the post.