Washington, D.C. April 17, 2018 – As of April 2018, mortgage rates continue to rise. There are various reasons for this. The Mortgage Reports states there are concerns about oil prices, trade wars and politics in the Middle East with the recent action in Syria. There also have been economic reports that have come out; retail sales for March showed gains for the first time in three months. This was much higher than expected. The Home Builder’s Index fell by a full point on all of this news, which indicates home builders are less enthusiastic about housing starts.
According to Zillow, as of April 17, 2018, the rate for a conventional 30-year mortgage is 4.66% and the rate for a 30-year fixed FHA loan is 4.417%. These mortgage rates are nearly a point higher than a year ago. Generally, the US economy is stronger and doing well so rates are higher than when the economy was not as strong, but higher rates make it harder for some Americans to buy homes.
Mortgage rates tend to rise when there are higher expectations from investors. Good economic news usually causes rates to rise; a strong economy makes investors worry about inflation, which causes fixed income investments such as bonds to lose their value, and yields increase.
As rates are continuing to rise, there are more people trying to buy homes before they rise further. According to a monthly survey of real estate agents from Credit Suisse, an index of buyer traffic increased two points last month. It seems that the threat of rates getting close to 5% this year is getting many fence sitters into the housing market. Some say that in 2019, mortgages could get close to 6%. If that happens, it is possible that the demand for housing could actually go up; some people who bought their homes in the last three years may not want to sell their home with a sub 4% rate and take out a new loan with a 6% rate.
As interest rates are continuing to rise amid various Trump administration economic efforts, such as tax cuts, below are some of the effects we are likely to see in the next year or two:
- Tax cuts make it easier for home owners to pay their loans. Many bank executives say that the tax cuts enacted by congress will allow people to pay off their debts faster. This will help banks as well because the Federal Reserve is continuing to raise rates. This increases the cost of loan payments by banks. It also makes it more expensive for borrowers to refinance their fixed rate debt when it is due. The tax cuts definitely seem to help the markets especially as interest rates are rising.
- Consumers are generally taking out fewer home loans. It is true there has been more buying activity recently as rates have risen, but this will likely tail off as rates continue to get higher. It is for certain there is much less interest in refinancing home loans now. As rates are likely to approach 5% in 2018, it is likely we will see more people continuing to rent instead of buy, but rising home prices will probably lead to higher rental payments.
- Banks are getting higher interest rate payments. Banks are enjoying higher interest rate payments on debt and they are not yet passing along higher interest rates to savers at this point. But corporations are seeing major increases in their deposit rates as banks want to keep them happy.
The takeaway for the housing market and mortgage rates markets are that rising rates will continue in the short term to lead to more home buying. Home buyers who were on the fence are jumping into the market because there are signs interest rates of fixed rate mortgages could top 5% in a year. But it is generally expected that home buying will ease off later this year as rates are getting higher.
What the Trump administration can do about any of this is unclear. When the economy starts to do better, unemployment is historically low, and wages are rising, investors become more optimistic, worries about inflation rise, and interest rates generally go up. It is worth remembering in the height of the last boom, 30-year fixed rate mortgages were in the 6% range. Even if we get close to that in the current expansion, most financial experts do not think we are headed for a major downturn. Getting a mortgage today is harder than a decade ago and you must prove that you have the finances to afford the mortgage.
We will need to see how much rates rise in the next six months to get a better idea about how all of this will affect the economy and the Trump administration.