January 22nd, 2018 8:52 AM by Shawn Smith NMLS#863501
Per The Mortgage Reports; It's a new year, but a similar story from years past is on repeat. Mortgage rates are low, but not for long.
Just about every analyst out there is calling for higher rates in the new year. The economy is breaking records, and a freshly minted tax code could induce economic expansion, but also inflation.
All these factors are bad for mortgage rates.
The good news, though, is that rates are surprisingly steady in the face of overarching changes like the new tax law. A golden opportunity still exists for those who are looking to buy or refinance a home in 2018.
The general consensus among mortgage rate forecasters, not surprisingly, is that mortgage rates will go up in 2018.
Following is a short list of predictions for 30-year fixed rates, according to the nation's top authorities.
Compared to today's rates below 4%, all of these are unwelcome but realistic predictions.
The question astute mortgage shoppers might ask is, why does everyone keep predicting higher mortgage rates? Basically, it's because mortgage rates are currently "too low."
Put another way, mortgage rates should be higher than they are. The economy has made a near-full recovery since almost a decade ago, when the housing downturn took its toll.
Unemployment topped out at 10% during the Great Recession and now sits in the low 4s. The stock market is booming, and housing prices are rising, too.
Mortgage rates are currently "too low."
Interest rates usually rise when the economy is doing this well. In the summer of 2007, in the midst of the last boom, 30-year rates neared 6.75% according to Freddie Mac. The boom prior to that — in 1999 — offered rates above 8%.
So why are rates still half that?
That's a good question, and one that many analysts have tried to answer. Many cite low inflation as discussed below. Others say wages for the average worker aren't rising enough to spur stronger spending, and therefore a true recovery.
And there could be something to that. If you don't own a house, you don't own stocks, and you haven't gotten a real raise in years, do you really feel better off than you did a few years ago? Probably not.
While one could speculate forever on why mortgage rates are still low, the fact that they are should spur refinancing homeowners and prospective buyers. By all accounts, there's a closing window on low rates.
The invisible ceiling will likely break apart in 2018.
On December 22, President Trump signed into law "the biggest [tax] cuts ever in the history of this country."
The new code brings a number of changes, some of which directly affect homeowners and home buyers.
For instance, you will no longer be able to write off unlimited property taxes (or state and local sales tax). Those items are now capped at $10,000. Likewise, the mortgage interest deduction — one of homeowners' most beloved deductions — is now applicable to the first $750,000 in mortgages, down from $1 million.
But those changes won't necessarily affect mortgage rates themselves. What could affect them are the economic changes that come with the tax cuts.
First, the new tax code cuts the corporate tax from 35% to 21%. If all goes as the administration plans, that cut could spark economic development. Corporations could focus on expansion and hiring with the newfound funds.
More workers getting paid more could lead to higher mortgage rates via increasing inflation.
The average person could get a tax break as well, adding to economic growth.
For instance, a person in the 25% tax bracket will see their tax reduced to 22%. Likewise the 15% tax bracket is now 12%.
In real dollars, a married couple making $100,000 per year will see 3% more of their income, or $3,000, in 2018.
Multiply that by the millions of couples in that tax bracket, and it could add to economic expansion. That is, if those families decide to spend the money.
But more money flowing throughout the economy is not the only way mortgage rates could rise.
By some estimates, the tax plan will add hundreds of billions to $2 trillion to the federal deficit according to Investopedia. That debt would be financed by selling more Treasury bonds.
A bigger supply of bonds would dampen investor demand. So rates would need to rise to keep investors buying.
Treasury bond rates don't guide mortgage rates, but another type of bond does: mortgage-backed securities.
A bigger supply of bonds would dampen demand. So rates would need to rise to keep investors buying. Higher rates on mortgage-backed securities mean higher rates for consumer mortgages.
So, should you take a "wait and see" attitude toward mortgage rates in 2018? Probably not.
You can't talk about mortgage rates without also mentioning inflation.
Low inflation is perhaps the best explanation for today's "too low" mortgage rates.
Inflation has been surprisingly low. The five years preceding October 2017 saw a rate of "core" inflation (excluding food and energy) of 1.58% per year, falling short of the Fed's goal of 2%.
Low inflation in times of recession are expected. But why hasn't inflation budged during solid "rebound" years?
For comparison, prices during the five years preceding October 2008 saw a robust 2.19% average increase per year.
Not even the Fed fully knows why inflation hasn't picked up to those levels. To date, it has explained it away as "transitory." Meaning, whatever is causing ultra-stable prices will soon go away.
We won't try to answer the question here, but consumers should note is that interest rates are on borrowed time.
Will mortgage rates rise sharply in January as inflation picks up? Not likely. However, a gradual increase is expected as 2018 progresses.
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