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Interest Rate Forecast for the Rest of the Year
Where are rates headed? For this edition of mortgage website content, we probably get asked that question more than any other and it’s natural because we’re in the business. Whether it’s a business acquaintance, a neighbor or a current client, it’s our job to help sort out the mortgage rate market so our current and future clients can make decisions about their financing. Perhaps someone is sitting on a hybrid loan that is getting ready to reset in a few months. Should that person refinance now or wait to see if rates fall? What would happen if rates fall to a certain level or what if the reverse happened and rates started to rapidly rise?
It’s In the Bonds
Let’s first point out that no one, absolutely no one knows where rates are headed. There’s just no such crystal ball. But what we can do is based upon our experience and reading the temperature of the mortgage market each and every day, provide some insight on where we’ve been and what we think the general trend might be. However, understand this is our educated opinion and not something we can guarantee. But again, we’re used to the question.
Mortgage rates are tied to a specific bond and lenders base their daily interest rates on these various bonds. Lenders use the same set of bonds and they all price their rates based upon various factors including profit, mortgage market share and loan volume. The most common mortgage issued today is the 30 year fixed rate conforming loan underwritten to standards set forth by Fannie Mae and these rates are currently tied to the bond lenders and investors refer to as the FNMA 30-yr 3.5 coupon. Because the index is indeed a bond, it acts like any other bond during the course of buying and selling that bond. Investors who buy bonds do so for the security of the investment and less so in the revenue generated.
When an investor purchases a bond the investor knows what the yield will be at maturity. An investor has the option to allocate funds in various sectors. If an investor likes a particular sector in the economy and picks out a player in that industry the investor can purchase a stock seeking a solid return. If other investors agree, more stock is sold which drives up the price of the stock. The investor can sell the stock at any time. With a bond, the strategy is safety. Very little returns compared to a stock.
If investors see the economy is slowing down they can pull money out of a shrinking stock market and park the cash in a bond until which time the investor feels it is safe to get back into the stock market. Because the return on a particular bond is fixed, when the demand for bonds increases the price goes up which will inversely drive down the yield on the bond. On the other hand, when the economy starts gaining steam, investors see the opportunity and sell those bonds to generate cash and get back into the stock market. As such, those who hold bonds must accept a lower price due to the decreased demand which then affects the yield.
The Federal Reserve Board, or The Fed, meets about every six weeks to discuss the economy and make predictions about what the economy will look like in the near future. The Fed has direct control over the Federal Funds rate which is the amount of interest banks can charge one another for a very short term. Very short as in overnight. Banks lend and borrow for overnight loans to meet federally regulated reserve requirements. If the Fed meets and agrees the economy is starting to heat up they will increase the Fed Funds rate, typically in 0.25% increments. A rate increase is made primarily to stave off any inflation in a growing economy.
According to Freddie Mac’s weekly mortgage rate survey, the 30 year fixed rate at the first of this year hovered around 4.20%. At the end of Q2 2017 the rate has actually fallen below 4.00%. This in spite of three rate hikes since December. That tells you the Fed doesn’t set your mortgage rate. Your lender does.
Okay, but why the focus on what the Fed does or doesn’t do? Because the Fed reviews a significant amount of economic data about the future of the economy and hence the future of rates. At the beginning of 2017 investors collectively believed there would be four rate increases in 2017. Now however while the economy is growing it’s doing to at a very gradual pace. Some investors believe the Fed will hold off on any more rate increases this year which is a sign of a slowing economy. That means investors can tilt toward the safety of bonds and lower their exposure in the stock market.
The Crystal Ball
What will rates look like for the second half of this year? If the economy continues along its sluggish pace it’s safe to say interest rates will remain in a relatively tight range. There may be another rate increase by the Fed this year but investors are looking at the prospect for a slower economy.
If you have an adjustable rate mortgage now and thinking of refinancing into a fixed rate there really is no reason to wait. Rates might very well fall but if they do it will be incremental. At least that’s our take. But if you’re on the fence about whether or not to lock in a rate consider this strategy- Assume that the decision you make to lock in a rate is the wrong one then decide which way would you rather be wrong.
Would you rather be wrong by locking in a competitive rate today because it’s a good one? If rates fall it likely won’t be by very much. We can calculate the differences in monthly payments for you at any time. On the other hand, if you’re wrong by waiting to see if rates go down and they don’t or worse rates continue to climb, there’s not much you can do about it. You can’t go back in time.
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