Mortgage rates reached new depths in December and January, setting historic lows south of 3 percent. Since then, rates have largely increased, and their trajectory to the end of 2021 depends on a factor that has not played a significant role in the mortgage market for decades – inflation…
That’s according to Greg McBride, CFA, Bankrate’s chief financial analyst. With coronavirus vaccines widely available, new optimism is emerging in the US economy.
“The tug of war over whether mortgage rates will move higher or lower revolves largely around inflation, ”McBride says. “If inflation does prove to be temporary, any increase in mortgage rates will be limited. So far, the data indicate a temporary surge in inflation. This should keep rates at 3 in the coming months. But if the Fed gets behind the curve and the genie of inflation comes out of the bottle, that’s a different story.“
Housing economists say growing optimism is putting upward pressure on rates. The Mortgage Bankers Association, for example, expects the 30-year fixed rate to hit 3.6 percent by the end of 2021. According to her forecast three months ago, the rate was supposed to reach 3.5 percent at the end of 2021.
Less refis, more purchases
If rates continue to rise refinancing The 2020 boom will slow sharply by the second half of 2021, says Michael Fratantoni, chief economist at the Mortgage Bankers’ Association.
“We think refrigeration volumes will drop sharply, especially in the second half of 2021, as the economy really finds its footing,” says Fratantoni.
While mortgage rates will rise enough to discourage refinancing, Fratantoni said, they will remain low enough to make home buying attractive. He predicts record mortgage volumes in 2021.
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“We expect a very strong housing market,” He says.
How the Fed affects rates
The Federal Reserve does not directly set mortgage rates, but the central bank sets the overall rate environment. The Fed cut its federal funds rate as the coronavirus recession hit and signaled that it would keep rates low for years, leading to little pressure on mortgage rate hikes.
“I think the Fed will keep its foot on the gas, keeping short-term rates practically at zero until 2022 and only very slowly starting to raise rates in 2023,” says Fratantoni.
Although the federal funds rate does not directly affect mortgage rates, there is a strong correlation between the mortgage rate. 10 year treasury bonds and a 30 year mortgage. This distribution expanded in spring and summer.
The typical gap between 10-year government bonds and 30-year fixed rate mortgages is 1.5 to 2 percentage points. In the first dire days of the COVID-19 pandemic, this spread rose to 2.7 percent. However, the gap returned to normal.
As a rule, an improvement in the economy correlates with an increase in mortgage interest rates. Economists and investors believe the US economy will bounce back in 2021 when COVID-19 vaccines are distributed. However, it is unlikely that mortgage rates will rise, housing economists say.
The Mortgage Bankers’ Association expects rates to reach 3.5% by the end of the year, a level that is quite affordable by historical standards.