2017 Mortgage Interest Rate Predictions
Interest Rates are on everyone’s radar after the Election.
Regardless of which dog you chose in the race, or how you felt about the race, we are facing a New Year, and a new direction.
On the night of the election, we saw the stock markets react violently to the prospect of a changing guard, and quickly decide on Wednesday morning that businesses are going to benefit from the election results.
Many folks much smarter than me predict that interest rates in 2017 are going to be higher than they were in 2016, but not all of them.
If you’re like me, you like to collect as many opinions as you can so that you can make an informed decision. This is especially important if you are concerned about the timing of buying, or refinance your home loan.
Scott and Josh Discuss Interest Rates
2017 Mortgage Rates Increase
Deutsche Bank released a special report titled Bigly rates repricing. This report is pretty technical and lays out its position on Government Bonds and swaps, Inflation, and Rates Volatility. Higher rates are anticipated.
- Trump’s economic plan cements the shift in the policy mix. It implies (1) increased fiscal spending, (2) reduced regulation, (3) a change of Fed leadership and (4) increased protectionism. Each one of these factors is bearish rates
- Increased geopolitical uncertainty remains a risk, but is unlikely to dominate for now
- The repricing of rates is moving from breakevens to the term premium and finally to the money market curve
- We maintain a bear steepening bias
You can read the complete report here
Kiplinger’s latest report on interest rates is also predicting higher interest rates:
The recent step-up in interest rates is likely to be permanent.
The 10-year Treasury bond rate jumped from 1.8% to 2.1% the day after the election, in anticipation that Donald Trump’s policy proposals would cause significantly higher government budget deficits, and that he would likely appoint more-hawkish Federal Reserve Board members who favor raising rates sooner.
Congress is likely to trim Trump’s wish list considerably, but uncertainty as to what will ultimately pass will persist for some time to come. In fact, this Trump premium in rates is likely to persist throughout his presidency.
You can read the full Kiplinger report here
The Boston Globe explains why the stock market rallied and mortgage interest rates rose last week.
Conventional wisdom said Donald Trump couldn’t win the White House. Conventional wisdom said that in the event of an upset, financial markets would crater. Conventional wisdom was wrong.
US stocks rallied Wednesday, as shock over the billionaire’s presidential victory gave way to measured bets that he could stoke economic growth by funding infrastructure and cutting corporate taxes.
Pharmaceutical and biotech stocks rose, freed from Democratic threats to restrict drug prices. Bank stocks gained on prospects of higher interest rates and less regulation.
You can read the full article here
Rates will Remain Low in 2017
Forbes contributor, David Trainer, makes the below argument that rates will remain low as a function of a shifting economy:
It’s time to consider a new paradigm for interest rates – a paradigm where treasury rates remain ultra low and riskier investments are priced by a decentralized market instead of a central bank.
For years, we have been warned that interest rates will inevitably rise from their “artificially” low levels back to the “normal” levels of the early 2000’s.
In the mainstream narrative, the Fed has been artificially holding interest rates down to stimulate the economy, and soon it will have to raise rates to more normal levels. If it fails to do so, pundits warn, the economy could suffer dire consequences.
There are three problems with this narrative:
1. Today’s low rates represent the long-run natural cost of capital.
2. Perpetually low interest rates can have positive effects on the economy.
3. The Fed doesn’t control interest rates, the market does.
You can read the rest of this article here.
How High Could Rates Increase?
As of the writing of this article, and the articles and opinions above, it’s been less than a week from the 2017 Presidential Election. To say that we’re in “new territory” is probably an understatement.
Over the last 30 days, mortgage backed securities had been trending slightly higher approaching the election.
The trend toward higher rates jumps the day after the election, and it looks bad, right? Maybe it’s not as bad as you think.
With the 24 hour news cycle that is the internet and cable news channels, any change in the market makes headline news. The reality is, rates are not necessarily jumping out of the gym, they are simply trending up.
If we believe the experts, the trend will continue toward higher rates
When we look at the YTD trend, you’ll see that despite “looking” like a drastic jump, we’re really only approaching where rates were this time last year.
If we pull back a little more to May of 2015, you’ll see that we spent most of that time at interest rates higher than they are today. You can see the first signs of this on the above chart when you look at the far left side of that trend.
Below, we have the same chart except it extends to March 2015. We spent most of 2015 at interest rates higher than all of 2016.
What you should take away from this is that it’s not going to be that bad. Most people do not have control over when you are in a position to lock in an interest rate on a home loan. This is the case when you are buying a new home.
If you own a home and are trying to time the market, this was the point where waiting too long if you haven’t already refinanced ot a lower rate.
It’s Not as Bad as You Think
So, what are those “higher” rates? You’re still looking at near historic lows. It’s a little complicated to put a % on the amount of the rate increase, because what we’re really seeing is an increase in “cost” of the rate.
For instance, on Monday, you could have used a 3.5% interest rate and generated enough closing cost credit to cover more than your closing costs, including funding a new impound account. This is a vital rate for many FHA streamline refinances.
On Friday, that same 3.5% could cover some closing costs, but may fall short of the whole amount.
If interest rates continue to increase, you can expect to see FHA rates in the high 3% range to the low 4% range for high balance or lower credit scores.
For Conventional interest rates, get used to 4% rates, with higher 4% range for high balance.
Listen, there’s a lot to be seen. Who really knows what will happen. All we know for sure is that we have enough information to make an educated decision, and that’s what makes America great.