Don't get too accustomed to sub-four percent mortgage rates.
Yes, they have become pretty common in recent years, but from a longer-term perspective they are extremely rare. Plus, there are specific economic developments that could push interest rates higher in 2015.
History says recent years are an exception to the rule
Over the past three calendar years (2012 - 2014), 30-year mortgage rates dipped below four percent exactly half the time. It's understandable that people have gotten used to this kind of thing. That, however, would also be a mistake.
The Federal Reserve has recorded 30-year rates since early 1971. Throughout that history, 30-year rates have dropped below four percent just 3.8 percent of the time. That means it happens on average in one of every 26 months, but it does not occur at regular intervals. All the months when rates have been below four percent have occurred after October of 2011. Prior to that, it did not happen – even once -- over more than 40 years of mortgage history.
Another way to look at this is that the long-term average for 30-year mortgage rates is 8.46 percent. What this history suggests is that once we get past this era of exceptionally low rates, we may never see this kind of thing again. And, there are reasons to believe that era might come to an end in 2015.
5 reasons rates may move higher in 2015
Here are five current reasons to believe rates may move higher in 2015:
- The economy is gaining momentum. According to the Bureau of Economic Analysis, after a dismal first quarter, the US economy put together real GDP growth rates of 4.6 percent in the second quarter and 5.0 percent in the third quarter. This kind of strong, accelerating growth tends to mean more demand for capital. Like everything else, loan rates respond to supply and demand, so more demand could mean higher interest rates.
- Oil prices are not likely to drop in half again. Inflation has a direct influence on interest rates, and one reason rates have been so low in recent years is that inflation has been low. Whenever you talk about inflation, a good place to start is with oil prices. Oil prices dropped by 46 percent over the course of 2014, according to figures from the US Energy Information Administration, and this contributed heavily to inflation being unusually low. However, the question is: do you expect oil prices to drop by roughly half again in 2015? That would mean prices of about $27 a barrel, something that has not been seen in over a decade. Even if the price of oil levels off, it would have less of a downward pull on inflation. In that case, the rate of inflation- - and with it interest rates -- would be likely to rise.
- Employment growth could add to inflation pressure. Oil is not the only potential driver of inflation. With strong job growth in 2014, the unemployment rate dropped below six percent for the first time since 2008. The lower that inflation rate gets, the more employers will be pressured to pay higher wages. That is another potential inflationary factor in 2015, and another reason mortgage rates could rise.
- Fed policy is evolving. The Fed stopped its program of buying bonds to drive long-term interest rates down a year ago, but the next step is selling off the massive inventory of bonds it acquired during the course of the quantitative easing program. The pace of those asset sales reportedly accelerated in the second half of 2014, and selling pressure in the bond market generally leads to higher interest rates.
- Lenders may demand a higher default risk cushion. According to the S&P/Experian Consumer Credit Default Indices, after declining through most of 2014 the default rate on primary mortgages increased for four straight months late in the year. While default rates are not yet at worrisome levels, this is a trend to watch. If mortgage lenders start to get nervous, they will be inclined to raise mortgage rates to give themselves a bigger cushion against defaults.
Whether you want to look backward to history for a sense of how unusual today's mortgage rates are, or forward to economic conditions that could push them higher in 2015, there are plenty of signs that rates this low represent an opportunity that is both attractive and fragile. This is the kind of opportunity that people who don't act kick themselves for missing.