By Kathy Orton
This week’s expected rate increase by the Federal Reserve should not cause home buyers to panic, if history is any indication.
Back in the early 2000s, after the tech bubble burst, the Fed dropped its benchmark rate to 1 percent. Then in the summer of 2004, it began raising it by a quarter percent. At the time of the central bank’s first increase, the interest rate on a 30-year fixed-rate mortgage was around 6.3 percent. During the next four months, it dropped to 5.7 percent.
As the Fed continued to raise the benchmark rate, the rate on a 30-year fixed-rate mortgage declined, falling to 5.58 percent in June 2005. By the time of its last increase in the summer 2006, the rate on a 30-year fixed-rate mortgage was at 6.68 percent. It had gone up less than half a percentage point even though the benchmark rate had climbed from 1.25 percent to 5.25 percent.
Could mortgage rates follow the same course this time around? Possibly. But keep in mind the Fed hasn’t raised its benchmark rate in nearly a decade. It’s hard to predict how the market will react to such a momentous change.
“You’ve got 33-year-old bond traders who’ve never in their career seen” the Fed raise its benchmark rate, said Bob Walters, chief economist at Quicken Loans, the largest non-bank mortgage originator.
John Wake, a self-described “geek-in-chief” at Real Estate Decoded and a real estate agent in Arizona, believes that in 2004 when the Fed increased the benchmark rate it caused an already frenzied housing market to become more manic. Home buyers, worried that rising rates would prevent them for affording a house, became desperate to buy right away.
“The real estate economy is more sensitive to interest rates than most of the economy,” Wake said. “An interest rate low enough to move the needle on the national economy may cause the real estate economy to overheat. We may have seen a bit of that the last couple of years. And because real estate is more sensitive to interest rates, expectations of higher rates have a bigger impact on real estate than most of the economy.”
Wake points out that often what people expect determines what they do. If home buyers expect mortgage rates to increase, they will act as if rates are increasing even if they don’t.
Walters doubts a slight mortgage rate increase will have much impact on the housing market.
Mortgage rates are more closely linked to 10-year US Treasury yields, and bonds tend to move ahead of, rather than after, central bank decisions. As a general rule, when 10-year Treasury yields go up, mortgage rates go up. According to Freddie Mac’s national survey of lenders, the 30-year fixed-rate average was 3.95 percent last week. It has remained below 4 percent since late July.
“Long-term rates are determined by the marketplace every day, by traders buying and selling bonds,” Walters said. Traders are “thinking about the returns they are going to get over time. Primarily what they are thinking about, especially on longer term bonds, which a 30-year mortgage goes into, they’re thinking about inflation.”
Inflation has been hovering below the Fed’s 2 percent target. The US economy has been doing fairly well lately, despite turmoil in the global economy, its effect on the dollar and low oil prices.
“You’re seeing a complete decimation of commodity prices right now,” Walters said. “That will influence inflation a great deal. It makes pricing power for wages almost impossible. And if you can’t get wage increases, it’s tough to have inflation. If you don’t have inflation, it’s tough to see rates go higher. We’ve essentially been at zero percent short-term interest rates for seven or eight years. And as long as that’s the case, long-term interest rates will stay down.”
No matter what the Fed does this week, it is likely that uncertainty in the global economy will continue to put downward pressure on long-term rates. The Mortgage Bankers Association is predicting the interest rate for 30-year fixed-rate mortgage will be around 4.8 percent at the end of 2016, that’s an increase of less than one percent.
What Fratantoni wonders about is what will happen after the Fed raises the benchmark rate, what its plan will be going forward.
“It really is not just when the Fed is going to make their first move,” he said.
Fratantoni is especially curious about what the Fed will do with its balance sheet. The central bank pumped trillions of dollars in stimulus into the market in the wake of the financial crisis, buying mortgage-backed securities. Pre-crisis, the central bank’s balance sheet was about $800bn, primarily in short-term Treasury bills. Now it’s $4.2tr, and the Fed is the largest single investor in mortgage-backed securities in the world, holding $1.7tr in MBS.
“The Fed has said at some point after they increase short-term rates they are going to begin to allow that portfolio to shrink, and they may more actively sell some of those securities,” Fratantoni said. “At some point, you could get to a level of rates, 6 to 6½ percent, that would really begin to crimp affordability and then that would be a real negative,” he said. “But at this point, it’s going to be just a very modest headwind. Most of the other fundamentals are suggesting a very strong housing market in the year ahead.”
Waters agrees. Although he demurred when asked what he thought the interest rate on a 30-year fixed-rate mortgage would be at the end of the year, he didn’t think it would be significantly higher.
“I tend to think from a 30-year fixed mortgage standpoint there’s not going to be an extraordinary change,” he said. “I don’t think they’ll go up or down more than a quarter percent, at least not initially. It’s not going to five percent and it’s not going to three percent. We’re going to stay in a tight band.”
Washington Post
By Kathy Orton
This week’s expected rate increase by the Federal Reserve should not cause home buyers to panic, if history is any indication.
Back in the early 2000s, after the tech bubble burst, the Fed dropped its benchmark rate to 1 percent. Then in the summer of 2004, it began raising it by a quarter percent. At the time of the central bank’s first increase, the interest rate on a 30-year fixed-rate mortgage was around 6.3 percent. During the next four months, it dropped to 5.7 percent.
As the Fed continued to raise the benchmark rate, the rate on a 30-year fixed-rate mortgage declined, falling to 5.58 percent in June 2005. By the time of its last increase in the summer 2006, the rate on a 30-year fixed-rate mortgage was at 6.68 percent. It had gone up less than half a percentage point even though the benchmark rate had climbed from 1.25 percent to 5.25 percent.
Could mortgage rates follow the same course this time around? Possibly. But keep in mind the Fed hasn’t raised its benchmark rate in nearly a decade. It’s hard to predict how the market will react to such a momentous change.
“You’ve got 33-year-old bond traders who’ve never in their career seen” the Fed raise its benchmark rate, said Bob Walters, chief economist at Quicken Loans, the largest non-bank mortgage originator.
John Wake, a self-described “geek-in-chief” at Real Estate Decoded and a real estate agent in Arizona, believes that in 2004 when the Fed increased the benchmark rate it caused an already frenzied housing market to become more manic. Home buyers, worried that rising rates would prevent them for affording a house, became desperate to buy right away.
“The real estate economy is more sensitive to interest rates than most of the economy,” Wake said. “An interest rate low enough to move the needle on the national economy may cause the real estate economy to overheat. We may have seen a bit of that the last couple of years. And because real estate is more sensitive to interest rates, expectations of higher rates have a bigger impact on real estate than most of the economy.”
Wake points out that often what people expect determines what they do. If home buyers expect mortgage rates to increase, they will act as if rates are increasing even if they don’t.
Walters doubts a slight mortgage rate increase will have much impact on the housing market.
Mortgage rates are more closely linked to 10-year US Treasury yields, and bonds tend to move ahead of, rather than after, central bank decisions. As a general rule, when 10-year Treasury yields go up, mortgage rates go up. According to Freddie Mac’s national survey of lenders, the 30-year fixed-rate average was 3.95 percent last week. It has remained below 4 percent since late July.
“Long-term rates are determined by the marketplace every day, by traders buying and selling bonds,” Walters said. Traders are “thinking about the returns they are going to get over time. Primarily what they are thinking about, especially on longer term bonds, which a 30-year mortgage goes into, they’re thinking about inflation.”
Inflation has been hovering below the Fed’s 2 percent target. The US economy has been doing fairly well lately, despite turmoil in the global economy, its effect on the dollar and low oil prices.
“You’re seeing a complete decimation of commodity prices right now,” Walters said. “That will influence inflation a great deal. It makes pricing power for wages almost impossible. And if you can’t get wage increases, it’s tough to have inflation. If you don’t have inflation, it’s tough to see rates go higher. We’ve essentially been at zero percent short-term interest rates for seven or eight years. And as long as that’s the case, long-term interest rates will stay down.”
No matter what the Fed does this week, it is likely that uncertainty in the global economy will continue to put downward pressure on long-term rates. The Mortgage Bankers Association is predicting the interest rate for 30-year fixed-rate mortgage will be around 4.8 percent at the end of 2016, that’s an increase of less than one percent.
What Fratantoni wonders about is what will happen after the Fed raises the benchmark rate, what its plan will be going forward.
“It really is not just when the Fed is going to make their first move,” he said.
Fratantoni is especially curious about what the Fed will do with its balance sheet. The central bank pumped trillions of dollars in stimulus into the market in the wake of the financial crisis, buying mortgage-backed securities. Pre-crisis, the central bank’s balance sheet was about $800bn, primarily in short-term Treasury bills. Now it’s $4.2tr, and the Fed is the largest single investor in mortgage-backed securities in the world, holding $1.7tr in MBS.
“The Fed has said at some point after they increase short-term rates they are going to begin to allow that portfolio to shrink, and they may more actively sell some of those securities,” Fratantoni said. “At some point, you could get to a level of rates, 6 to 6½ percent, that would really begin to crimp affordability and then that would be a real negative,” he said. “But at this point, it’s going to be just a very modest headwind. Most of the other fundamentals are suggesting a very strong housing market in the year ahead.”
Waters agrees. Although he demurred when asked what he thought the interest rate on a 30-year fixed-rate mortgage would be at the end of the year, he didn’t think it would be significantly higher.
“I tend to think from a 30-year fixed mortgage standpoint there’s not going to be an extraordinary change,” he said. “I don’t think they’ll go up or down more than a quarter percent, at least not initially. It’s not going to five percent and it’s not going to three percent. We’re going to stay in a tight band.”
Washington Post
