Mortgage rates for home loans have been sitting at historically low levels since the 2000’s, hitting bottom levels not seen for 30 or 40 years prior. Every year since 2005 everyone has been expecting these rates to eventually go back up again, but they have not. So, no surprise, folks continue to expect the same in 2016. Is there a reason for rates to stay low?
The best place to start on a projection assessment is the people who back the home loans in the first place. Decades before, the federal government instituted programs to help homebuyers get into more homes. That essentially involved backing the bank loans made by lenders if they followed specific rules. No surprise then, the rates that these lenders allow tend to be the range that consumer bank lenders provide borrowers with a bit of a markup added, especially if the borrower’s credit record is not perfect.
Fannie Mae is one of the big institutions involved, and they surveyed a number of consumers on their expectations for mortgages recently. Over half clearly expected higher lending rates by 2017 while just over a third thought the rates were going to stay the same in 2016 and 2017. Only 5 percent had any serious expectation that the lending rates were going to continue downward. That said, consumer opinions have nothing to do with rate-setting.
The big driver of low mortgage rates has been and continues to be the Federal Reserve’s interbank lending rate. Not only has this kept the cost of money extremely low for all banks involved, it has also created the platform for extremely low benefits to consumers as well. While there has been strong expectation and anticipation that the Reserve would starting raising interbank rates in 2015 and 2016, it hasn’t happened yet. However, the indicators that would drive up the rates are continuing to pile up. That includes rising labor figures and hiring, increasing inflation on core commodities, and stagnating dollar values. Every financial quarter now seems to be a waiting game to see if the party has ended yet.
The California mortgage rates have been one of the reasons that the recovery from the 2009 Recession has occurred with the speed it did. The fact that people could continue to refinance and purchase with an extremely low borrowing cost has sustained the real estate industry nationally when it could have been pummeled for years to come otherwise. People rarely note how powerful the homebuilding and homebuying industry can be for financial solvency of regions and communities. The Recession gave us all a powerful glimpse, however.
For 2016 most professional estimates are continuing the place the mortgage rates well in the 4 percent range without any major, marked increase above. In fact, some are pegging the rate average to only make it up to 4.65 percent by December 2016 on a 30-year fixed mortgage. And even into 2017, few are expecting that the loan cost in interest is going to get very far above 5 percent at all.
It’s important for buyers and sellers to understand, however, how fast markets can change. The significant drop to the current rates which occurred in the 2000’s happened in a very short period of time. The same could happen in the opposite direction under the right circumstances driving rates up. Again, the Federal Reserve holds many of the keys that will ultimately drive rates higher. The other aspect is people’s own financial behavior. A spike in inflation could clearly send home prices higher, especially if the Reserve thinks that the value of money is dramatically falling beyond their control and comfort level.
So going forward, 2016 is definitely going to be a comfortable year still for those looking to borrow as well as refinance. Many in the selling business expect this condition to hold at least until 2018 as well. Beyond that point we get into a new presidential administration and direction for the country. And the last time that occurred in 2000 it had a bit of a downturn effect on the country as well as the economy. There’s nothing to say that will happen again with 2016’s election, but it is a major driver at a time when there are no defined incumbents for the President’s job, and a lot of untested contenders.
What can sellers and buyers do with this projection? Well, clearly the ability to take advantage of low rates right now is a big opportunity still in place. Not only does buying continue at a brisk pace with the recovery from the 2009 Recession, banks have loosened up on their credit requirements a bit again, making it easier to get a loan or refinancing. They can also prepare for the future when inevitably loans will go up after all. That will be a time when home selling will naturally slow down because the cost of borrowing will go up as well. Buyers will have to save more for the cost, and sellers will have to be more competitive either in price offsets or more amenities offered. But until then, it’s a matter of waiting for the change to hit and enjoying the current rates while they last.
2 Point Highlight
The big driver of low mortgage rates has been and continues to be the Federal Reserve’s interbank lending rate.
The low rates have been one of the reasons that the recovery from the 2009 Recession has occurred with the speed it did.
