What Will Happen with Mortgage Interest Rates in 2016

Last year Freddie Mac reported that their lowest 30 year fixed-rate mortgage rates hovered between 3.59% and 4.09%. This is the least amount that rates have moved during a calendar year since 1998. And the continuation of low rates has helped consumers, in particular first time homebuyers. With rent prices rising and mortgage payments staying relatively the same those debating whether to own their own home have begun to see that home ownership makes more sense. Mortgage lenders are also making it easier by approving a high volume of home loans and by making it easier for people to refinance. If trends continue, 2016 is shaping up to be another great year for mortgage interest rates. But after only one month it may be premature for excessive excitement.

What Will Happen with Mortgage Interest Rates in 2016

Mortgage Interest Rates

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This year will mark more than 5 years since the average monthly rates for 30 year fixed rates for mortgages (FRM) topped 5%, and 15 years since the average hovered around 8%. In 1981 the average was twice that! There is no certainty in predicting how rates will fluctuate but economists agree that we won’t be seeing those rate levels anytime soon. However, the historically low levels that we are currently experiencing now will change. The question is when and how much.

At the end of 2015 economists from Fannie Mae and the Mortgage Bankers Association (MBA) released predictions for 2016 mortgage rate trends. Fannie Mae forecasted average rates to be 4% by the end of the first quarter and 4.2 % by years end. The MBS forecast is higher, predicting 4.4% at the end of the first quarter and 5.1% by the end of the fourth quarter. Forecasting trends is extremely difficult. Even the Federal Reserve cannot predict what the rate will be and they set it themselves! In fact, at the start of 2015 many predicted that rates would approach 5%. Rates in 2015 spent all but eight weeks in the 3% range.

The prime interest rate is influenced by a large number of various factors involving economic gains both domestic and abroad. Generally, when the economy is good rates increase. Currently we are seeing lower numbers in unemployment and inflation. This is a good indicator that rates could increase as the Federal Reserve takes this into consideration. Likewise, strong gains in gross domestic product, incomes, consumer spending, and even foreign economies tend to drive up interest rates quicker. On the flip side if there is a domestic or global recession/deflation there is a good chance that we could see slow increases, stagnation, or even decreases in mortgage interest rates. If the current outlook on the economy stays consistent through the year then we most certainly would not see mortgage rates go up. Most experts concur that we will most likely see some kind of rate increase by the end of 2016, but don’t expect to see them rise anywhere near 5%. There are a few factors backing this up.
The main reason is that global economies remain relatively weak. China, Japan, Russia, and Europe are all falling short of expectations. These uncertainties benefit mortgage-backed securities (MBS). And when MBS’s do well, mortgage interest rates decrease. Since America’s economy is currently performing better than the rest of the world it is bringing in foreign investment and helping to hold down rates. Another factor is that the Federal Housing Finance Agency (FHFA) could start to retrogress on loan level pricing adjustments. This could reduce rates up to 1.5% with some borrowers. And lastly, more and more lenders have transitioned to paperless transactions. This practice shortens the time that it takes to close on a loan. Shorter closing times help to lower mortgage rates.

Even though the Federal Reserve has decided not to raise mortgage interest rates at this time we’ll have to wait and see what happens through the rest of 2016. The drop in oil prices is dragging down inflation, and the Fed has decided that while they will eventually increase rates they will do so at a slothful pace in order to help keep the economy moving forward. But one thing that the Federal Reserve must also keep in mind is that Millenials are beginning to enter the housing market. Many have large amounts of student loan debts. An increase in rates would certainly make it difficult to impossible for them to purchase a home. Eliminating this demographic from the real estate market would be harmful to housing markets across the nation. It’s a safe bet that 2016 will see continued low mortgage rates.