The Feds are having another rate hike!
So…it doesn’t really effect long term mortgage rates. The Federal Reserve is expected to raise rates 3x in 2018, a 0.25% each time. This can influence longer term mortgage rates, but really influences cash and short term lending rates, like HELOCs, credit cards, and personal/auto loans. As you may have noticed, The Fed has been raising rates for two years and long term rates have remained relatively unchanged.
How are mortgage rates set?
• Mortgage rates are more closely tied to the 10 year treasury, with a 30 year mortgage rate typically around 1.50% to 1.75% higher than the 10 year treasury.
• The bond markets expectation on inflation and the economy is the main driving force behind longer term rates and mortgages. (This is the recent driver in rates going higher)
• The economy is clicking on all cylinders at the moment and getting a fiscal stimulus (boost) from tax reform and potential infrastructure spending by the government. This should lead to high growth, higher inflation and high bond yields.
Quantitative Easing: the introduction of new money into the money supply by a central bank
Additionally, the policy of quantitative easing by the Federal Reserve, where they bought longer term bonds to keep mortgage rates low, is
expiring. Over 800 billion is maturing in the next two years, which will also lead to higher mortgage rates.
My expectation is that the 10 year treasury finishes the year between 3.00% and 3.25%, leading to a 30 year mortgage rate of 4.75% to 5.00%.
How this effects buyers?
1. Inflation will continue to influence rent costs. For home buyers that can establish a more permanent sense of residency, locking in a 30 year payment for housing now is attractive.
2. There’s a chance that supply tightens up. Less available choices for buyers and more competition. Sellers may not want or be able to sell
their current home and move into a nicer home or even a comparable home for the same payment they have now.
3. Many buyers will be forced to move downward in price or explore cheaper neighborhoods due to the new, higher rates.
What will this do to housing?
1. It will begin to make housing less affordable for many.
2. Highly unlikely it would cause 2008 mortgage crisis over again. Most of housing has moved from weaker hands to stronger, adjustable rates are less prevalent and changes in regulations has helped too.
I’m not sure how rates will affect price, especially on the west coast. It will, however, begin to make it unaffordable for many people.
Whether it’s for those looking to purchase a home for the first time, or for growing families to transition into a bigger home, or perhaps baby boomers looking to downsize, NOW is the best time to buy longer term and lock in an affordable rate/payment.