Some experts say higher. Some say lower. Which mortgage rates forecast should you believe? Lending Tree took a look at economic data and conditions to provide some perspective on where rates may be heading between now and early 2015.
Expert Mortgage Rates Forecasts
According to mortgage finance company Freddie Mac, as of mid-August 30-year rates stood at 4.12 percent. Here is a sampling of where some experts say those rates may be headed:
- The Mortgage Bankers Association forecasts that 30-year rates will be at 4.9 percent by the first quarter of 2015.
- The Financial Forecast Center predicts that 30-year rates will be at 3.92 percent in early 2015.
- Fannie Mae's forecast is for 30-year rates to be at 4.4 percent in the first quarter of 2015.
For those of you keeping score at home, that's one vote for sharply higher rates, one vote for lower rates, and one vote for only a moderate rise in rates. What should you make of all this? Perhaps some information about the underlying economic environment will help you make your own mortgage rate forecast.
Key Economic Influences
Here are three critical things to keep in mind when contemplating the direction of mortgage rates:
- Mortgage rate history. Because history does not repeat itself in an orderly manner, historical numbers do not tell us precisely what will happen. However, to the extent that a long data record tells us what outcomes have usually occurred in the past, history can give us an idea of what is likely to happen. Federal Reserve figures show that 30-year rates have averaged 8.5 percent over time. That would suggest that if rates were to return to normal, they would be twice as high as they are now. While that is an important reminder of how unusual today's rates are, it should also be remembered that much of that mortgage rate history played out during a much more inflationary environment than the current one. So, to put that 8.5 percent average in perspective, it helps to look at inflation.
- Inflation environment. Figures from the Bureau of Labor Statistics show that while mortgage rates were averaging 8.5 percent, inflation was averaging 4.2 percent. However, over the past five years, inflation has averaged less than half that, at 2.0 percent. This has been an important factor in allowing rates to remain so low. Lately, though, inflation has been perking up. If it closed just half the distance between its current level and the long-term average of 4.2 percent, inflation would rise by 1.1 percent. This would suggest a similar rise in mortgage rates, to about 5.2 percent. That would be a pretty steep rise, but the upside is even higher. Normally, mortgage rates have maintained a cushion of 4.3 percent over inflation, but over the past five years that cushion shrank to about 2.3 percent. If mortgage lenders returned to their customary cushion over inflation, it could add another 2 percent to rates. Whether or not the spread between interest rates and inflation remains as narrow as it is now depends a great deal on monetary policy.
- Monetary policy. To help revive the housing market, the Federal Reserve has been buying huge amounts of long-term bonds and mortgage-backed securities in order to artificially push long-term interest rates down. This program continues, but is tapering off and is on track to end later this year. The real key, though, to when long-term rates are allowed to rise to more natural levels will be when the Fed starts to sell off the huge inventory of securities it has amassed via this program. Given the still-fragile state of the economy and the housing recovery, expect the Fed to exercise extreme caution in unwinding that inventory. It is almost certain that no significant portion of that inventory will be sold off between now and year end, so the spread between interest rates and inflation should remain relatively low.
The good news, then, is that a return to 8.5 percent mortgage rates does not seem likely any time soon, both because inflation is well below normal and because the Federal Reserve will transition monetary policy very cautiously. However, if recent trends continue, expect enough of an inflationary surge to push 30-year rates towards the 5 percent mark by early 2015. That means the Mortgage Bankers Association forecast of 4.9 percent seems most in line with underlying conditions.
History, the inflation trend, and even monetary policy all suggest that mortgage rates are more likely to rise than to fall. Then again, in some respects those rates have been beating the odds for more than five years now. Whether you accelerate your mortgage plans or feel you can afford to take your time depends largely on whether you feel rates can continue to beat the odds and stay at unusually low levels.