Mortgage rates rising, but still affordable
Mortgage rates were historically low for most of 2020, but as the pandemic recovery gathers steam, that is changing. Rates have mostly been climbing in 2021, and that trend is likely to continue through the year as more folks get vaccinated and back to work.
But that doesn’t mean mortgages are about to become unaffordable either. Many people will still be able to secure great loan rates compared with pre-pandemic times, and millions of homeowners could still potentially save by refinancing their loan before rates move even higher.
The economy is complicated, so there isn’t a totally cut-anddried explanation for why mortgage rates were so low last year, but the simplest way to understand it is because Treasury rates went down.
“Mortgage rates typically follow the 10-year,” said Joel Kan, associate vice president of economic and industry forecasting at the Mortgage Bankers Association (MBA). “This hit to the Treasury rates came at a time when we already started to see rates come lower in the beginning of 2020 and there was already the start of some refi wave.”
For much of 2020, economic uncertainty kept Treasury rates suppressed, which encouraged low mortgage rates, too. The 10year Treasury generally tracks fixed mortgage rates.
The days of sub-3% mortgage rates are probably over for now. Getting the pandemic under control is in the foreseeable future for the U.S., which means the economy is going to start getting back to some kind of normal in the months ahead.
“Our forecast right now is to see rates continue to increase,” Kan said. “Between now and the end of the year, looking for another 50 basis points of an increase because economic growth is expected to continue at the current pace or pick up.”
MBA predicts that the average rate on a 30-year fixed loan will be 3.6% by the end of 2021. But the rise shouldn’t be quite as sudden as the falloff was last year.
“It’s been a gradual increase because in the second half of last year there was still a lot of uncertainty over the vaccine and how quickly things would reopen,” Kan said. “On aggregate things have come back pretty well. Of course there are households that are still suffering, but on aggregate, things turned around a lot faster than most expected.”
As businesses reopen and consumers start spending more in the hospitality sector again, mortgage rates are likely going to keep climbing gradually throughout the year.
Increasing consumer demand may squeeze supply chains and result in more inflation. The result is almost certain to be higher mortgage rates ahead.
“In addition to that because of this potential for a bigger jump in growth, we’ve seen inflation move higher, the prices that consumers pay for goods and services,” Kan said. “We’ve already seen a lot of reports from builders that, with the high demand for housing, not only do we have a low supply of housing, but the costs to build are going up,” he added. “That’s all going to act together to push rates higher, faster.”
For homebuyers, rising rates shouldn’t have as big an impact as increasing prices. An ongoing housing shortage has made for a strong seller’s market, and although mortgage rates are gradually climbing, the bigger squeeze for housing affordability seems to be coming in the form of competition from other buyers.