Over the last 12 months we have seen rates rise about 1%. Last November the 30 year fixed was hovering in the high 3’s and now we see it flirting with 5%. So where do we see rates over the next 6 months? I see the 30 year fixed remaining fairly stable for the next 6 months. Why is that? Below I list the factors and conditions for my prediction:
- The economy is leveling off. While the economy over the last year has been hot it looks to now be cooling off a bit. With the Democrats now controlling the house look for less legislation to be passed. President Trump and the Republicans passed numerous bills that cut regulations and cut taxes that stimulated the economy. The odds of these type of bills now passing has decreased, therefore cooling off the economy.
- Inflation is in check. The 2 biggest factors in the Federal Reserve increasing rates are the economy and inflation. With the Consumer Price Index (CPI) and The Producer Price Index (PPI) looking to be in check, this will keep the Federal Reserve from raising the short term rates very much.
- Pressure on the Federal Reserve. While some believe the Federal Reserve works in a bubble with no outside pressure, I just don’t think that’s realistic. Yes they look at all the economic factors and inflation but they also hear the President telling them to relax and keep the rates down. President Trump is relying on low rates to keep the economy on track and he knows that the higher the rates go the harder it will be to keep the economy rolling. While I believe this pressure he puts on the Federal Reserve to keep rates low is the least important factor in their decision, it is still a factor.
- Federal Reserve Chairman Powell’s recent comments. Over the last month and a half the Chairman has made a 180. Yesterday, Powell said that rates are “just below” the neutral level that the Fed wants. In an interview Oct. 3, Powell said rates were a “long way from neutral.” As a result, yesterday’s comment provoked a major reaction in the financial markets. This to me is a strong indicator that the Fed is putting the brakes on a bit.
While their are certainly other factors that go into what happens with the rates, I believe these 4 factors are enough information to make an educated guess on where rates go in the next 6 months.
Every 6 months or so I give my rate predictions for the coming 6 months. As I’ve stated in previous blogs, the FED has been eager to raise rates for the past couple of years. But the economic numbers have just not supported the increases they would like to make. Since Trump was inaugurated the FED has raised the Fed Funds rates twice, each time increasing .25%. In general, the FED believes Trump’s policies of less taxes and less regulations will create greater growth in the economy. This increase of .5% in the Fed Funds rates has driven 30 year fixed mortgage rates up about .75%. Currently the Freddie Mac weekly rate average is 4.1% with .5 points up from 3.42% on October 6th.
So where will we be by years end? I see this upward trend continuing. The FED is just itching to keep raising the Fed Funds rate and it will not take much for them to pull the trigger. If Trump gets his wish of lower taxes I believe the Fed will raise right away. One of Trumps biggest campaign promises is to get the economy robust again. If he succeeds with his agenda and lowers taxes (personal and corporate) the economy will accelerate and the FED will raise rates 2 to 4 more times this year. My prediction is that 30 year fixed rates will be hovering around 5% by years end.
Every 6 months I give my prediction on what will happen with 30 year fixed mortgage rates for the next 6 months. Before I give my prediction and discuss the reasons, lets see how I did with my prediction 6 months ago (feel free to go back through my blog over the last 2 years and look at all my predictions). 6 months ago Freddie Mac’s weekly survey had rates at 3.84% with .7 points. I predicted rates would rise .25% to .375%. The weekly average this week had rates at 3.92% with .6 points. Not quite a .25% increase but not a bad prediction. I basically predicted rates would rise slightly and they did. So, what is my prediction for the next 6 months? RATES WILL RISE TO 4.25% BY JUNE.
Why the increase? There are many, many factors that go into what direction mortgage rates will go including the global economy, gas prices, inflation, unforeseen global events, politics, etc. But to predict rates just listen and watch the FED. The FED increased the FED funds rate in December and has indicated that they will continue to raise rates gradually. This is the strongest indication of what will happen with rates. The FED has been itching to raise rates for the last year and finally felt that economic indicators warranted an increase in December. With the FED eager to raise rates they really do not need robust economic figures to accomplish their goal. Any slight plus news and rates will rise. Any negative news will probably be reasoned away. In my opinion, it will take some horrible economic numbers for rates to fall over the next 6 months. I don’t foresee that happening. I think we are currently at the bottom with rates hovering slightly under 4%. I believe the days of 30 year fixed rates in the 3’s is about ready to say goodbye for a long, long time!
It’s once again time for my 6 month rate prediction. I’ve been doing a rate prediction blog for the past year and a half and I’ve been pretty spot on. Currently the 30 year fixed Freddie Mac average rate is 3.84% with .7 points. So what will the rate be at the end of this year? I’m going to predict a slight increase of .25% to .375%. Why the increase?
Several factors lead me to believe rates will rise. The biggest being that the FED is just dying to raise them. For the past year and a half they have wanted to increase the FED Funds rate but the economy has just not supported an increase. While the unemployment rate has dropped the number of people who have stopped looking for jobs has risen. Plus wages have not increased either. I believe all of these things will improve slightly and the FED will react immediately. All we need is one stellar employment report and rates will rise quickly.
We have now had a 5 year stretch with 30 year rates under 5% and a 13 year stretch with rates under 7%. That’s incredible. When I entered the business 28 years ago rates were 10.5%. So lets be thankful and enjoy it while it’s still low!
On the first Friday of every month the job numbers come out at 8:30am. I always turn on CNBC an hour or so before they come out to get a feel of what the experts think and to see how the numbers might impact rates. My wife is not a fan of the first Friday of every month because she likes the Today Show and a struggle for the remote takes place. It’s really the only time in the mornings where we fight for the remote (I let her have the remote in the mornings in order to get a few brownie points to watch sports at night instead of the food network or animal channel). In any event, you get it’s an important day for me. Basically the jobs report will determine what happens to rates for the next 30 days. A stronger than expected number will lead to higher rates and a weaker than expected number will lead to lower rates. Obviously, there are other factors at play but the jobs report is the biggest factor.
What do the experts think the number will be? “I think in general the labor market moderated a little bit in February after some really strong months. I think the weather was a little bit of a damper and it’s time for a breather,” said Amherst Pierpont’s chief economist, Stephen Stanley. He expects to see 220,000 nonfarm payrolls and a slightly lower unemployment rate at 5.6 percent. “A lot of this February data is going to have a weather effect. It was bad enough to have some impact. I do think we’ll snap back in March or April,” he said.
So 220,000 is the barometer. What rates will do for the next 30 days has a lot to with how close the numbers are to 220,000. Anything close to that will not cause much of a move. A much higher number, like maybe over 300,000, will likely cause rates to rise. A weaker number than expected, maybe below 140,000, would likely cause rates to fall.
My prediction is the number will be right around 220,000 and we won’t see much of a move. I’m on a little hot streak with my predictions lately. My prediction for UVA basketball at the beginning of the year was an ACC Championship and a 27-3 record (currently UVA is 28-1 and once again ACC Champs). Not a bad prediction. Let’s see if I’m better at interest rate or basketball predictions!
I have to brag a little. I’m on fire with my rate predictions! Every 6 months I have a rate prediction for the next 6 months. 6 months ago Freddie Mac’s survey showed 30 year rates at 4.12% paying .6 points. I said rates would fall. What are they today? Freddie Mac’s survey says 3.92% paying 0.5 points. I also correctly predicted the previous 6 months (Dec 2013 -June 2014) when rates stayed flat. So, now it’s time for the next 6 month prediction. I predict rates will rise slightly.
What is my reason?
I’ll keep it simple. The government is finally waking up a bit when it comes to the housing market. I believe a strong housing market is one of the most important elements in having a thriving economy (in general, the better the economy the higher the rates). There’s been a few real problems with the housing market over the last 2 years. First, the regulations have become way too tight. There was an over correction to the mortgage collapse and the government is finally starting to see that and the process of loosening up has begun. Second, the government basically took the first time home buyers out of the equation. Other than Rural Development loans, there really are no good options for first time homebuyers. FHA has become ridiculously expensive and conventional requires 5% down. That’s a ton of money to come up with if you are buying your first home. But this week Mel Watt is announcing that Fannie and Freddie are reducing their down payment requirements to 3%. That’s a start. I predict the regulations will continue to loosen and the government will continue to come up with ways to help the first time home buyers get the housing market going.
The housing market will continue to improve with more first time homebuyers getting in the market. This will help improve the economy therefore driving rates up a bit. I don’t see a dramatic improvement in housing right away but I do see the government waking up and by the spring, I believe you will really see the housing market starting to thrive.
The percentage of all cash transactions in the U.S. housing market in December of 2013 was 47%, up from 27% a year ago. According to Michael Simonsen, co-founder and CEO of Altos Research, less of these transactions were by big institutions on Wall Street and more were from cash-rich consumers buying a second or third property.
Credit scores are easing for FHA mortgages but not conventional. The average credit score for FHA loans this year has been dropping steadily while conventional loans are roughly the same as 2013. The average score for conventional loans is currently 755.
New regulation stemming from the financial crisis has cost the six largest U.S. banks $70.2 billion as of the end of last year, according to a new study from policy-analysis firm Federal Financial Analytics Inc.
The number of appraisers dropped Nationwide to $80,500 down from $90,500 in 2010.
Freddie Mac has officially declared that the refinancing boom is over. The company’s Refinance Report for the second quarter of 2014 said that the longest refinance boom in the 24 years since it started keeping records officially ended in the second quarter. That occasion was marked when the share of mortgages originated for refinancing fell below 50% for the first time since the third quarter of 2008.
The number of loans from $1 million to $10 million to buy single-family homes in the 100 largest metropolitan areas surged to more than 15,000 in the second quarter, the highest ever, according to property data firm CoreLogic.
Fannie Mae and Freddie Mac have changed their large deposit rule. Borrowers now have to source deposits that are 50% or more of their qualifying income. The old requirement was 25%.
There was talk before the Friday jobs report that rates would rise because the jobs report would be awesome. Didn’t happen. The report was a bit worse than anticipated therefore keeping rates down again for at least another month.
Every 6 months on my blog I put out an interest rate prediction. In November I predicted rates to remain close to where they currently are now. How was my prediction? In November of 2013 the average rate from Freddie Mac’s weekly survey on a 30 year fixed rate was 4.16% paying .8 points. Last week Freddie Mac’s survey showed rates at 4.12% paying .6 points. Basically, that’s the same rate. So, pretty good prediction, thank you very much!
So where will rates be at the end of the year? I believe rates are going to fall. Why? Below are all my reasons:
1) The Economy. The economy is not getting stronger and I don’t believe it will get better the rest of the year. It’s June and the pundits are still blaming everything on the weather. Enough already.
2) Housing. Housing is slow. Take out all the Wall Street cash buyers and the numbers are just not good. Too many people are under water, there are not enough first time home buyers, and wages are not increasing while home prices continue to increase. Something has to give. One thing that will help is lower rates. Another would be a low down payment mortgage for first time home buyers. I’m predicting both will happen.
3) Decreasing Mortgage Production. Mortgage production is at a 17 year low and by the end of the year it might be at a 25 year low. Low mortgage production is bad all around. It’s bad for most major bank’s bottom lines. It’s bad for all the lay-offs in the mortgage industry. It’s bad because less people refinance meaning less money goes into the economy. And it’s bad because it means there are less purchases which effects numerous areas of the economy in a negative way.
Put all these factors together and rates have to fall. I predict June and July economic numbers to remain weak. Blaming bad winter weather will no longer be an option.
It’s been a rough week for rates. Yesterday the FED announced it will start tapering and the rates increased approximately .125%. The bigger hit came Monday when Fannie Mae announced their new pricing adjustments. These new fees go into effect for loans purchased after April 1st, 2014. That means most lenders will start changing their fees now. Take a look at the chart below. For a 5% down mortgage with a 720 credit score the hit is currently .5% (basically .125% in interest rate). The new fee is 2%! That is roughly .375% in interest rate! Wow! So, in one day, we basically saw the rates rise .5%. That’s rough.
This is just a nasty hit. A 20% down 800 credit score gets hit .5%? That’s brutal. In my opinion, this is not a good time for these increases. The housing market is starting to come back somewhat and these increases will not help housing. They will only hurt.
This Friday the monthly unemployment numbers will be announced. The Jobs Report is always the biggest indicator for what direction the rates will take for the next 30 days. If the number is strong look for rates to rise and tapering talk to escalate. If the number is weak look for tapering talk to be pushed back and rates will fall. If the number is in line with expectations look for rates to remain stable for the next 30 days.
Below are the other economic indicators coming out this week:
Monday, December 2: ISM Index
Wednesday, December 4: ADP National Employment Report; New Home Sales; Beige Book
Thursday, December 5: Initial Jobless Claims, Gross Domestic Product (GDP); GDP Chain Deflector
Friday, December 6: The Jobs Report; Consumer Sentiment Index (UoM)