By W. Todd Galde
In our increasingly global economy there are a number of internal and external economic factors that can affect our home mortgage rates. Here is a highlight of some of the key domestic variables currently in play, and what to watch out for in 2017:
- Longer term mortgage rates are set by supply and demand. So, what happens if the New York Fed, which has been buying agency MBS to the tune of $1-2 billion a day, decided to stop buying? Last week Philadelphia Fed President Patrick Harker reiterated that the Fed should consider ending reinvestments once the Fed funds rate reaches 1% (currently at 0.75%). This is consistent with other earlier statements from Fed officials. Less buying/demand for bonds would result in a lowering of prices, which correlates to higher rates. This is something to watch out for.
- The Federal Reserve has talked nonstop about how they would like to see inflation reach their benchmark rate of 2% and it looks like that has finally happened. One wildcard here is how President Trumps’ ambitious but ambiguous policies could influence growth, inflation, and wages/unemployment. Last week we learned that both headline and core inflation rose above 2% over the year for the first time since mid-2014. This bodes well for the future of FOMC interest rate hikes - if you want to see them.
- Breakeven inflation expectations for 5-year and 10-year horizons have risen since election day. This is important to note for the future of FOMC interest rate hikes. Some people are projecting that inflation is going to continue its rise (making rate hikes more probable), however we have already witnessed FOMC members consistently over-forecast inflation.
- Similarly, policy proposals to scale back financial regulations and reduce the tensions between regulators and the regulated may free up bank capital and allow for greater lending (fingers crossed!). Moreover, if there is a greater expectation for domestic economic growth, then both bank and non-bank credit may open up. Thus, interest rates may not rise as much or as quickly as some analysts are projecting because the flow of lending to Main Street will increase (there's that suppy and demand thing again). Perhaps the increase in inflation will not be sustained significantly in the future. If so, then the Fed may be able to live with less than the three funds rate increases projected for 2017. This would keep long-term interest rates down.
- Note that external economic variables continue to be in play. In fact, just recently we were influenced by overseas news. Britain's Supreme Court ruled that the UK government must hold a vote in parliament before beginning the process of leaving the European Union, enacting further hurdles for the Brexit to take place.
- Look to the stock market (which hit historical levels again), treasury auction demand, and the release of a few important reports to continue driving bonds in the coming weeks and months.
So, what is one to do, if considering to buy or refinance? It's relatively simple:
If you are needing or wanting to refinance, there is no reason to wait. Get it done. Rates are not going to be much lower than they are now and there is a bigger chance of them being higher with every passing month. Looking to get cash out for college tuition, remodeling the home, or another signficant purchas? Get it done. Looking to convert out of an FHA loan and in to a Conventional loan? Get it done.
If you are looking to purchase, keep up the search until you find the home you are truly excited about. Do not buy a home now just because you are afraid of rates going up. It is a much better proposition to find the home you will LOVE and pay a slightly higher rate, than to find the home you LIKE and have a slightly lower rate. You buy a home for the location, the amenities, the # of rooms, the structure, the schools... those are the things you should be bragging about, not the incredible rate you got on a home you want to move out of in 2-3 years.
I am Todd Galde...
Advising. Smart. Financing.