More signs that mortgage rates could be heading up

Written By: Joel Palmer, Op-Ed Writer

According to the Federal Reserve, the U.S. economy averaged 170,000 new jobs per month from January through October.

The nation’s GDP grew 3 percent year-over-year in both the second and third quarters. Third-quarter economic growth occurred despite the effects of destructive hurricanes in Texas and Florida.

And despite the improving labor market and overall economic growth, inflation has remained below 2 percent.

What does that mean? For the mortgage industry, it will likely soon lead to lenders charging higher rates to homebuyers and those looking to refinance.

The economic numbers, including an upward revision to third quarter U.S. Real GDP growth, were part of comments made by Federal Reserve Chair Janet Yellen to Congress last week. 

“I expect that, with gradual adjustments in the stance of monetary policy, the economy will continue to expand and the job market will strengthen somewhat further, supporting faster growth in wages and incomes,” Yellen stated.

Yellen’s testimony and the revised GDP numbers led to “a surge in long-term interest rates,” saidLen Kiefer, deputy chief economist for Freddie Mac. That could result in an uptick in mortgage rates in the coming weeks.

Prior to this year, the Federal Reserve raised the federal funds rate only twice in a decade. So far in 2017, they’ve increased the rate twice — in March and October. And many anticipate another rate increase in December. 

In fact, Freddie Mac stated in its most recent Primary Mortgage Market Survey that a Fed rate hike later this month is almost a 100 percent certainty.

Echoing those sentiments, nearly half of Bankrate’s panelists in its weekly Mortgage Rate Trend Index believe mortgage rates will rise in the next week or so.

While movements in the federal funds rate do not directly impact mortgage rates, they can influence them. In fact, the Fed had delayed interest rate hikes until recently largely because of concern about the impact on the housing market.

Mortgage rates are largely determined by the price of mortgage-backed securities set by Wall Street. And those prices are influenced by the Fed’s economic outlook. The more positive that outlook, the higher mortgage rates will typically rise. By raising its funds rate, the Fed is projecting stronger economic growth.

“We continue to expect that gradual increases in the federal funds rate will be appropriate to sustain a healthy labor market and stabilize inflation around the FOMC's 2 percent objective,” Yellen continued in her Congressional testimony.“That expectation is based on the view that the current level of the federal funds rate remains somewhat below its neutral level--that is, the rate that is neither expansionary nor contractionary and keeps the economy operating on an even keel.”

Many in the industry expected higher mortgage rates in 2017. However, the 30-year rate has held below 4 percent for 20 consecutive weeks.

According to the weekly Freddie Mac report, the average rate for a 30-year fixed mortgage was 3.90 percent last week, while the average rate on a 15-year fixed mortgage was 3.30 percent.

However, Freddie Mac noted that the average rate for a 5/1 Hybrid ARM, which is more sensitive to short-term rates than the 30-year fixed mortgage, increased 10 basis points to 3.32 percent in last week's survey. 

“The spread between the 30-year fixed mortgage and 5/1 Hybrid ARM is just 58 basis points this week, the lowest spread since November of 2012,” said Kiefer.

About the Author

As an NAMU® Opinion Editorial Contributor, Joel Palmer is a freelance writer who spent 10 years as a business and financial reporter and another 10 years in marketing for the insurance and financial services industries. He regularly writes about the mortgage industry, as well as residential and commercial real estate, investments, and retirement income planning. He has also ghostwritten books on starting a business, marketing, and retirement income planning.

Opinion-Editorial (Op-Ed) Disclaimer For NAMU® Library Articles: The views and opinions expressed in the NAMU® Library articles are those of the authors and do not necessarily reflect any official NAMU® policy or position. Examples of analysis performed within this article are only examples. They should not be utilized in real-world application as they are based only on very limited and dated open source information. Assumptions made within the analysis are not reflective of the position of NAMU®. Nothing contained in this articles should be considered legal advice.