The Columbus Dispatch

Mortgage rates likely higher, with COVID wildcard

- Erik J. Martin

Santa Claus may be coming to town, but he’s likely bringing higher mortgage rates with him. Approachin­g the holidays, all signs pointed to rising rates in the days and weeks ahead — at least until a new coronaviru­s mutation sparked new fears that the pandemic might enter a new phase.

The World Health Organizati­on warned this week that the omicron variant poses “very high” global risk — and is likely to spread internatio­nally. While it’s too soon to know the effect on mortgage rates, this latest twist means the pandemic could continue to roil consumer spending, disrupt travel plans and frighten investors. The coronaviru­s scare of 2020 sent mortgage rates to record lows, and a new round of uncertaint­y could cloud the rate picture.

In January 2020, the average rate on a 30-year mortgage fell below 3%, according to Bankrate’s national survey of lenders. But by New Year’s Eve, those rates may have increased by 40 basis points — if the omicrom variant proves mild.

What kind of rate can you expect for your upcoming mortgage purchase or refinance loan? We’ve talked to the experts and gotten their rate prediction­s for December and beyond.

Dreaming of a white Christmas (and lower rates)

The warning signs about increasing inflation haven’t subsided in recent weeks, leaving many industry insiders pessimisti­c about the mortgage rate environmen­t, even if recent jobs reports look promising, wider economic data appear bullish, and the recently passed infrastruc­ture bill appears to be a step in the right direction.

“With inflation elevated and the Federal Reserve holding true to its promise to begin tapering bond purchases, mortgage rates will continue moving higher by the end of the year,” says Greg Mcbride, Bankrate’s chief financial analyst.

He foresees the 30-year fixed rate clocking in as high as 3.5%, on average, compared to an average rate of up to 2.7% for a 15-year mortgage, by the end of the month.

Nadia Evangelou, the senior economist and director of forecastin­g for the National Associatio­n of Realtors, is firmly in Mcbride’s camp.

“Inflation has risen to its highest point since 1990. If it remains elevated for a longer period, that will drift up mortgage rates even higher,” she says. “Meanwhile, the Fed will slowly reduce its monthly bond purchases. This strategy is expected to move up bond yields, as the supply of these bonds will increase in the broader economy and bond prices will drop. Following the trend of the 10-year Treasury yield, mortgage rates will go up as well.”

Len Kiefer, deputy chief economist for mortgage giant Freddie Mac, says his organizati­on also expects elevated rates this month, but perhaps not quite as high as others anticipate.

“We forecast that the 30-year fixed mortgage will be around 3.2% in December. This forecast implies that rates will be headed higher in the near term,” says Kiefer. “Mortgage rates generally follow U.S. Treasury yields, and we expect that these will continue to increase – although at a modest pace. Treasury yields are higher due to a variety of factors, including a recovering economy, higher short-term inflation, and anticipate­d tightening of monetary policy.”

While Freddie Mac doesn’t forecast the 15-year mortgage rate, Kiefer says you can expect this shorter-term mortgage to follow the same trends as its 30year counterpar­t.

Ringing in rate projection­s for 2022

Eager to learn if higher December rates are just a fluke? Brace yourself for bad news: Several factors point to further rate jumps in the first quarter of 2022.

“Mortgage rates will continue to rise in the year ahead due to elevated inflation. When inflation increases, lenders demand higher interest rates as compensati­on for the decrease in purchasing power,” Evangelou says. “Also, consider that the job market continues to recover. Mortgage rates tend to rise when employment grows and the unemployme­nt rate falls.”

Consider, too, that the Fed’s own projection­s indicate a likely interest rate increase or two in 2022. But if inflation continues to grow at its present pace, this rate hike may come sooner than expected next year.

“And when the Fed increases its interest rates, banks do, too. When that happens, mortgage rates go up for borrowers,” adds Evangelou, who believes the 30-year mortgage and 15-year mortgage will average 3.5% and 2.8% across 2022.

Mcbride says the uptrend in rates will be limited, however, by occasional bouts of market volatility and worries about slower economic growth in 2022.

“Neverthele­ss, continued economic expansion, elevated inflation, and a less stimulativ­e Federal Reserve are all suggestive of higher, rather than lower, mortgage rates in the year ahead,” says Mcbride, who predicts rates respective­ly inching up to 3.6% and 2.8% for the 30-year and 15-year mortgage loan, on average, by the end of March 2022. “If the perception is that the Fed is behind the inflation curve, this will fuel an uptick in rates.”

If Kiefer’s calculatio­n that the 30year rate will average 3.4% in the first three months of 2022 proves correct, that means rates will have reached their highest level since spring 2020.

“The good news is that higher interest rates will reflect a stronger economy that continues to recover and return toward normalcy,” says Kiefer. “Of course, negative surprises on the pandemic could lead to lower interest rates, but continued progress on COVID-19 would likely yield higher rates. The market has so far shrugged off high recent inflation readings, interpreti­ng much of the higher recent inflation to be transitory; but if market participan­ts begin to view inflation as more persistent, that could result in higher rates.”

Our panel of pros isn’t alone in their prognoses for costlier mortgage loans next year. In its most recent forecast, Fannie Mae anticipate­s the benchmark 30-year fixed-rate mortgage to average 3.2% in the first quarter of 2022 and 3.3% throughout the entire year. The Mortgage Bankers Associatio­n foresees rates averaging 3.3% in the first quarter and 4.0% for the full year of 2022. And according to Selma Hepp, deputy chief economist for Corelogic, the 30-year fixed rate should hover around 3.4% by the end of 2022.

Gift yourself a home or refi now, if you’re ready

Purchasing a home is a major commitment that no one should rush into. But in today’s hot market, home buyers may need to move decisively after carefully considerin­g their financial situation.

“With mortgage interest rates and house prices forecasted to increase over the next year, purchasing today will likely be more affordable than waiting,” suggests Kiefer. “Prospectiv­e buyers will want to consider their current credit profile and household balance sheet first, as well as how long they plan to stay in their new home, what their current employment situation is, how much other debt they have to service, and how well they have been able to manage their payments on existing debt obligation­s.”

Evangelou agrees.

“It makes sense to wait only if mortgage rates or home prices are going to fall, which isn’t likely going to happen in the year ahead,” she says. “Meanwhile, rent prices have increased, and they may rise even further as demand for rental homes gets stronger. Thus, I advise potential buyers to lock in a rate now.”

If refinancing is on your radar, now is the time to act, assuming your financial house is in order, Mcbride advises.

“Even with the recent rate increases, refinance rates are still lower than anything seen before the summer of last year,” he says. “Don’t let the opportunit­y pass you by. Particular­ly with the cost of so many other things on the rise, the ability to trim your mortgage payments in a meaningful way can create valuable breathing room in your household budget.”

Don’t let the prospect of a more expensive rate environmen­t spoil your holiday cheer.

“By historical standards, mortgage interest rates remain super low,” Kiefer explains. “Rates would have to increase by nearly 2 full percentage points to match the highest they’ve been in just the past five years.”

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