Based on Freddie Mac’s Primary Mortgage Market Survey, the 30-Yr. mortgage rate rose for the 3rd straight week ending 1/20/22, to start the year, to 3.56%, up 45bps from 3.11% on 12/31/21.
Why are rates increasing?
Remember this note about what high inflation means for the housing market? “Inflation shows up in the housing market in the form of higher rates on loans, higher costs for construction labor and materials, higher rents, and higher home prices.” When Presidents comment on the economy, it can often signal big shifts in policy; in this case, Biden’s speech about inflation on November 10th signaled a new attitude and tolerance for higher rates to combat inflation. Again on January 19th, he reiterated the need for the Fed to withdraw the extraordinary monetary stimulus that had been used to offset the impact of pandemic shutdowns.
The Fed has already begun the process of tapering its purchases of both Treasuries and mortgage bonds. That process is expected to be completed by March, at which point the Fed is likely to implement its first interest rate increase since December 2018. The Fed’s actions have caused the increase in mortgage rates so far this year. However it is important to realize that 1) the Fed only directly controls very short-term interest rates, not long-term treasury or mortgage rates, and 2) there is not a clear relationship historically showing that reduced bond purchases by the Fed or increased Fed Funds rates lead to higher long-term interest rates (for instance, since long-term interest rates take into account long-term inflation expectations, higher short-term rates can reduce inflation expectations to the point where long-term interest rates actually fall, and can even be lower than short-term rates, which is called inversion).
It is unlikely mortgage rates will fall much from here without a sharp reduction in inflation; this level of mortgage rates is likely to stay with us throughout this year.
How do increased rates translate to monthly payments?
Rates are now above average 2020-2021 levels, but below average levels from every other year going back to 2012. We are sitting at the midpoint of 2019-2020 levels, which means that for an 80% LTV loan on a $500k home, the monthly P&I payment would be $1,810, up from an average of $1,677 in 2021 based on the 2.96% average rates that year.
How does this impact my homebuying strategy?
Mortgage rates increases are a headwind against the types of extreme home price gains we saw in 2021. A wise reaction to higher mortgage rates is to assume that home price gains will be more subdued going forward and you should be more selective in your home search; with less FOMO driving the market, buyers will not be penalized for being more patient than they have in the past 1-2 years. A 20% annual gain in home prices gives you an escape path if you think you made a mistake in your recent home purchase. A 5% annual gain provides far less cushion if this occurs. This is a time to use more data and a more thoughtful, organized approach in your home search. We are here to help!
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