Let’s face it: we have been living in a nice dream world for a long time. Rates have remained at historically low levels for nearly a year—on December 30 of last year, we saw a plunge in rates followed by another big drop on June 24, when Great Britain voted to leave the European Union (“Brexit”). It may appear as though we are waking up, however; mortgage rates have been drifting slowly higher since late September, 2016.
Is the party really over? Should we all be bracing ourselves for more costly mortgages?
To answer that question, we should look at why rates move in the first place, and what forces influence them.
What’s influencing 2017’s mortgage rates
You may already know that most mortgages sell to investors. Fannie Mae and Freddie Mac are the best known of them. Fannie and Freddie buy mortgages from the lenders who originate and fund them. They pool these mortgages by the thousands into a type of bond called a Mortgage Backed Security (MBS).
These bonds are bought and sold on Wall Street just like any other type of bond. The price of these bonds is a function of the demand for them. When the demand rises, their price goes up because more people are buying them. The converse is also true: when investors are more interested in selling the bonds, their price drops.
Price and rate move in opposite directions with bonds, so when the price of the bond goes up because of strong demand, mortgage rates go down. When the price of the bonds goes down, rates go up.
There are two important forces that influence the price of MBS: fears of inflation, and uncertainty on the world stage. Inflation affects bonds because it causes them (and the income they generate for investors) to be less valuable. The Federal Reserve has some influence on the inflation rate with its monetary policy; it reduces a key interest rate, the Federal Funds Rate, to stimulate the economy, or raises the rate to slow it down and control inflation.
The Fed Open Market Committee (FOMC) meets eight times a year to decide what they’re going to do with the Federal Funds Rate. The next meeting is on December 13-14, 2016, and many analysts and pundits believe there is a good chance they will vote to increase the Federal Funds Rate by .25% then.
Does that mean that mortgage rates are going to spike up .25% on December 15, 2016? Probably not. Because the bond market hates inflation, the Fed’s action to slow it down is often friendly to the bond market, at least for a short time. In December of last year, for example, the FOMC voted to raise its rate for the first time since 2006. We saw bonds rally then, which brought interest rates down for a time. We do often see mortgage rates drop after a Fed rate increase because money tends to flow out of the stock market into the relative safety of bonds.
We also enjoyed a drop in rates this past summer, with the news of “Brexit.” This was because with the economic turmoil and uncertainty in the wake of that vote to leave the European Union, the British Pound plummeted, the international stock markets followed, and money flowed into—guess where?—nice, safe mortgage bonds. In general, bad news in the world, especially news that causes stocks to sell off, is good for mortgage bonds and rates.
We do know that rates cannot stay so low indefinitely. The fortune tellers who read financial charts tell us that there are signs and omens pointing to higher rates. This means that the slightly lower rates we may see if there is a December, 2016 Federal Funds Rate increase could be short-lived going into 2017.
Essentially, we know that rates are currently trending higher in fall of 2016. While nothing about future rates is certain, we expect that we may see a small dip in mortgage rates in December, 2016 followed by a return to rising rates in 2017.
How to hedge against the prospect of rising rates
Here is a strategy that could save you some money. If you are considering a refinance or purchase over the next few months, you should get into a position to lock a rate quickly. This means that you should get your application in place so that you’ll be ready to lock with no delay when the time is right.
If you are in the market to buy, you can get your loan application approved before having identified a property to buy. This way, when you are ready to make an offer, you’ll be able to lock your rate and close much sooner than if you were starting from scratch at the time rates were beginning to make their move.