WE’RE HEARING that the days of 30-year fixed mortgage rates below 4% may be over.
MoneyRates.com senior financial analyst Richard Barrington says he is telling consumers, “You don’t want to count on 3.5% mortgage rates ever returning.”
Barrington says there could be more drops in mortgage rates if the economy, particularly employment growth were to start to slow, he considers it unlikely.
Forecasts for mortgage rates or the weather can never be an exact science, but both are broadly used, and when one is investing in mortgages, plausible outlooks that can potentially be incorporated into strategies are worth reviewing.
In his recent mortgage rate forecast, Barrington examined the Federal Reserve’s plans for scaling back its rate intervention in line with the unemployment rate, and also what the 30-year rate would be without Fed intervention given current inflation.
“What I did was look historically at what the premium over inflation has been and then applied that to the current inflation rate,” he says of the two-step process, which also was based on Fed statements indicating a 6.5% unemployment rate would be a sign intervention should be removed.
Projecting this based on labor/employment trends, Barrington found that it could occur in about 14 months, bringing the average 30-year fixed-rate to about 6% by the middle of next year.
Barrington said he also is factoring in a widening in lenders’ margins as Fed intervention in rates is removed. The inflation premium has been artificially suppressed with the Fed buying mortgage-backed securities, so when that artificial demand is gone, “that premium is going to widen,” he notes.
With the 30-year spending most of the last year and a half below 4%, he says, “A big reason why I did this study was my concern people think that’s kind of normal,” which is something to consider in anticipating consumer reactions.
While a lot of what has happened in the latest market cycle has been unprecedented, normalcy could return, along with things like what has been historically some suppression of home prices in line with a rate rise, Barrington notes.
But while the recent run-up in rates, including the 53 basis point jump in the average 30-year primary market rate found in Freddie Mac’s last survey (the week ending June 27) has its downside, he says to keep in mind, “There is a good side to all this,” too, in terms of signs of economic improvement.
Bonnie Sinnock is managing editor of National Mortgage News and editor of Origination News. She has been covering the mortgage industry since 1995.