Now is the time to borrow, since rates are low and you will repay the debt in cheaper dollars, experts say.
By Jeff Lazerson | firstname.lastname@example.org | MortgageGrader.com | December 18, 2021
The Federal Reserve has announced it is going to drain the inflation swamp starting in January with a 25% reduction ($10 billion) in monthly mortgage-backed securities purchases. And it forecasts three one-quarter-point rate increases in 2022.
Wholesale prices jumped to a year-over-year record of 9.6% in November, according to the U.S. Labor Department. The core producer index jumped 6.9%.
Now, Federal Reserve Chairman Jerome Powell has stricken the word “transitory” from his comments while postulating loud and proud on inflation.
Meanwhile, the mortgage markets are behaving inexplicably differently than you’d think given the persistently high inflation rates. Why aren’t the mortgage gods pricing in higher mortgage rates? Don’t they know inflation will erode the value of mortgage-backed securities down the road?
The 10-year Treasury closed at 1.47% on Wednesday, Dec. 15. The 10-year daily average for 2021 year-to-date is 1.45%. Mortgage rates tend to mimic Treasury rates.
This week’s Freddie Mac 30-year fixed rate averaged 3.12%, just 17 basis points higher than its 2021 year-to-date weekly average of 2.95%. That means the payment on a $600,000 mortgage has risen $56 to $2,569 a month, according to Freddie Mac numbers. That’s a mere 2.2% payment increase.
Prices must go up to stay ahead of the rate of inflation. Goods, services, rents. Everything is going up. But not so much when it comes to mortgages.
One reason is this economic environment is different than any in history.
“We are living in a world of uncertainty instead of risk,” said Richard Green, director of USC’s Lusk Center for Real Estate. “We are in a COVID world. Every three months we are getting a new punch in the gut. We are spending trillions of dollars. The U.S. has never done this in non-wartime.”
Green explained you can assign probabilities of risk when you have data. For example, there is a one-in-six chance of a die landing on any number (1-6) when you roll it. The direction of interest rates would only be a guess because there is no risk and probability data to study in this unprecedented COVID economy.
Green also observed investors around the world are aging. They might be more inclined to accept a smaller yield on their money in exchange for being protected by the safety of the U.S. Treasury market.
Even though the Fed is going to reduce its bond buying binge, plenty of others are staying put, which helps keep mortgage rates low.
Others are making predictions about the direction of mortgage rates.
“MBA forecasts that mortgage rates will rise to 4% by the end of 2022 and may be more volatile as the Fed backs away from the market,” said Mike Fratantoni, Mortgage Bankers Associations chief economist.
The 30-year fixed will be at 3.84% by the end of 2022, according to Jordan Levine, chief economist for the California Association of Realtors.
Levine sees the current 30-day California mask mandate as herky-jerky, adding more operational pressure on California businesses.
“This will further stoke homebuyer demand” as more people stay home, he said.
Green believes the real cost of money is negative right now.
“Go buy. Money is free right now. Get a fixed rate, not an ARM,” he said. “If you are paying more than 3.5% (on a current mortgage), refinance. If you can afford a 15-year fixed, do that. Rates are under 2%.”
The unusual combination of today’s low mortgage rates and higher inflation provides a window of opportunity for the consumer, added Brad Seibel, head of mortgage at digital mortgage lender Sage.
“The low rates make borrowing attractive now,” Seibel said. “Inflation benefits existing borrowers as you can repay the loan in cheaper future dollars. It’s a very unusual, and likely short-term window.”
Freddie Mac rate news: The 30-year fixed rate averaged 3.12%, up 2 basis points from last week. The 15-year fixed rate averaged 2.34%, down 4 basis points from last week.
The Mortgage Bankers Association reported a 4% decrease in mortgage application volume from the previous week.
Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $647,200 loan, last year’s payment was $156 less than this week’s payment of $2,771.
What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages without points: A 30-year FHA at 2.375%, a 15-year conventional at 2.45%, a 30-year conventional at 2.99%, a 15-year conventional high-balance ($647,201 to $970,800) at 2.625%, a 30-year conventional high-balance at 3.19% and a 30-year fixed jumbo at 2.875%.
Eye catcher loan of the week: A 30-year mortgage with an interest-only adjustable rate for the first 10 years at 2.875% without points.
Jeff Lazerson is a mortgage broker. He can be reached at 949-334-2424 or email@example.com. His website is www.mortgagegrader.com.
Jeff Lazerson - Mortgage Columnist since 2011