Mortgage rates set to rise again

The Freddie Mac weekly 30 year Fixed Rate Mortgage (FRM) report showed a further drop to 4.09% this week, but this number does not reflect the increase in interest rates late in the week (the Freddie Mac survey is based on mortgage rates from Monday to Wednesday each week and is published on Thursdays).

How has the mortgage rate moved recently?
The FRM moves most closely with the yield on the 10 year Treasury note (10T). Over the last 4 years the average spread – the difference between the FRM rate and the 10T yield – has averaged around 1.7%. Let’s see how the two rates have moved since the Election:

mortgage rates

Source: US Treasury, Freddie Mac

The yield on 10T increased after this week’s Freddie Mac survey, suggesting that the FRM will increase next week, back towards the 4.20 level.

Why did interest rates increase this week?
As the economy strengthens so the Federal Reserve will increase short-term interest rates. The Fed has indicated that it expects three rate increases in 2017, depending upon the strength of the economy. The Fed’s dual mandates are labor markets and inflation. Fed Chair Janet Yellen said this week: “The unemployment rate is now close to estimates of its longer-run normal level”, and “labor underutilization… has retraced nearly all of the steep run-up that occurred as a result of the recession.” As far as inflation is concerned, “we are now much closer to the FOMC’s 2 percent objective than we were just a year ago”.

As HSH said in its weekly commentary: If employment is closing in on “full” and inflation on “target”, then there is not much reason for the Fed to hold off on changing policy before long.

What will drive mortgage rates from here?
While the Fed sets short-term interest rates (which directly impact credit card rates, auto loans and hone equity lines of credit), the market sets the rate on 10T, but as expectations increase for stronger economic growth and higher inflation, the yield on 10T is likely to continue to rise. Various forecasts have suggested that the yield could rise to 2.75% or even 3% by year end. Add 1.7% to that and you get an idea of where the FRM may be later this year:  4.45-4.7%.
As always,the problem with forecasts is that they predict the future which is uncertain, but current mortgage rates are historically low and, in a growing economy and rising housing market, at attractive levels.

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