So far, low mortgage rates have survived threats from a strengthening US economy and a shift in Federal Reserve policy. Could inflation be the next thing that threatens to drive mortgage rates higher?
Current home mortgage rates have stabilized after rising around the middle of last year, and when you compare mortgage rates today with their long-term history, today's are still among the lowest mortgage rates ever. Inflation may be the next thing that reminds people not to take those low mortgage rates for granted -- and this is an issue that could hurt would-be buyers, sellers, and long-term home owners.
Current Home Mortgage Rates in Perspective
Figures from mortgage finance company Freddie Mac show that current home mortgage rates are about 80 basis points (.8 percent) higher than they were a year ago, but after rising in the late spring and early summer, they have leveled off and have even eased back down a little bit.
Mortgage rates have eased despite some economic forces that could have pushed them much higher. A strong economy would be likely to lead to higher mortgage rates, and according to the Bureau of Economic Analysis, real Gross Domestic Product (GDP) growth accelerated in each of the first three quarters of last year. However, GDP growth slipped a little in the fourth quarter, and economic indicators have been especially weak since the new year.
The Federal Reserve's quantitative easing program has been a major force in pushing mortgage rates down, but in December the Fed made the long-awaited announcement that it was going to start phasing that program out. However, the initial steps the Fed has made have been so slight that their market impact has been minimal, and weakening economic data should further encourage the Fed to go slow.
Where does that leave mortgage rates? If you compare mortgage rates now with their historical average, they are roughly half their normal level today. That comparison makes the 80 basis point rise over the past year seem almost a non-event.
The Inflation Threat to Low Mortgage Rates
History is a reminder that mortgage rates could go much higher than they are today, and inflation is one force that could push them there.
Low mortgage rates have been facilitated by low inflation -- just 1.6 percent over the past year, according to the Bureau of Labor Statistics. However, the price of gasoline (an important component of the Consumer Price Index) has been on the rise. According to the Energy Information Administration, retail gasoline prices rose by 4.3 percent in the first three weeks of February. Crude oil prices rose by 5.5 percent over same time period, so the pressure on gas prices might continue.
If the trend in oil and gas prices continues, it could spread to other components of inflation, and this would almost inevitably drive mortgage rates higher.
Buyers and Sellers on the Same Side of the Fence
Ordinarily, in real estate as in any market, buyers and sellers have opposing interests. Rising housing prices benefit sellers at the expense of buyers, and falling prices do the opposite. When it comes to mortgage rates, though, the interests of current home owners and would-be buyers are aligned.
Here's a rundown on how higher mortgage rates would affect buyers, sellers, and even home owners who don't intend to put their homes on the market:
- Buyers would face higher interest expense if mortgage rates rose. This would reduce the amount they could put towards principal, meaning they would have to settle for less expensive homes.
- Sellers would see their sale prices depressed for the same reason listed above - buyers who face higher interest expenses can afford to borrow less money.
- Home owners could be impacted in a variety of ways, even if they don't intend to sell. Those with adjustable-rate mortgages (ARMs) would find themselves facing higher monthly loan payments as ARM rates rose. At the same time, higher refinance rates would limit opportunities to refinance a mortgage. Meanwhile, higher home equity rates would make it more expensive for home owners to access the equity in their properties.
From a short-term perspective, current home mortgage rates may seem high simply because they were lower a year ago. From a longer-term perspective though, current mortgage rates are still among the lowest in history. Also, from a forward-looking perspective, the ever-present threat of inflation makes today's rates look like a bargain.
These broader perspectives on mortgage rates should encourage buyers, sellers, and home owners to be decisive about taking action in today's market. Both the lesson from history and the threat from inflation are reminders that low mortgage rates should not be taken for granted.