Home mortgage interest rates had a quiet summer, remaining in a surprisingly consistent range from mid-May to mid-September. Will this consistency continue for the remainder of the year, or are consumers in for a more uncertain mortgage interest rate environment?
According to figures from the Federal Reserve, interest rates on 30-year mortgages remained between 4.10 percent and 4.20 percent from May 15 through September 11. Two things stand out about that range of mortgage rates: it is both unusually narrow, and unusually low. To forecast whether or not mortgage rates will continue these unusual behaviors, it helps to look at four factors: economic growth, inflation, Fed policy, and history.
According to the Bureau of Labor Statistics, job growth in August was a so-so 142,000. This fell well short of the average of 212,000 for the prior 12 months. One off month would not be cause for much concern, had the economy not established a pattern since the end of the Great Recession of flopping every time it seemed to have gathered momentum.
Could the economy be in for another such disappointment? Certainly, the economy seemed to regain momentum when the real growth rate of US Gross National Product topped 4 percent in the second quarter, after shrinking by 2.1 percent in the first quarter. However, given the cycle of hope-then-disappointment that the economy has followed for five years now, it is natural to by cynical. August's fall-off in job growth is troubling, and there is the very real possibility that some of the second quarter's growth was merely pent-up demand after a harsh winter.
Bottom line: until the economy proves more resilient, there is little reason to view growth as a driving force behind higher mortgage rates.
Like the economy overall, inflation looked like it was gathering momentum in the second quarter, before falling off more recently. The Consumer Price Index gained just 0.1 percent in July, and fell by 0.2 percent in August. Though price declines are a worrisome sign for the health of the economy, that August number seems to have been driven by a drop in the often-volatile energy sector, so there is as yet no reason to believe it will continue.
The wild card here is that growing conflict in energy-producing areas of the world could spark price increases that would send inflation sharply higher. For now though, the year-over-year inflation rate is just 1.7 percent, a level which gives mortgage rates of just above 4 percent some breathing room.
The Federal Reserve announced no major changes following its mid-September meeting. Short-term interest rates will remain near zero for the foreseeable future, and the Fed will continue its gradual slow-down of asset purchases designed to drive down long-term rates.
It is this second transition that is of potential interest to mortgage shoppers. The Fed's asset purchases had a direct hand in driving mortgage rates down to record lows. Clearly, a change in that policy could allow mortgage rates to begin to rise back to more normal levels. The real issue is this: it is one thing for the Fed to cease its asset purchases, it is another for it to start to sell the huge inventory of bonds it has acquired through that program in recent years. When the Fed starts to sell those bonds, or even to let them begin to mature without rolling them over, expect some upward pressure on mortgage rates.
History always helps to put economic developments in context, and it is especially valuable now since the environment of the past few years has been so unusual. History can serve as something of a reality check.
For example, in recent years people have gotten used to mortgage rates being below 5 percent, but from an historical perspective that has to be viewed as an aberration. According to Federal Reserve figures, interest rates on 30-year mortgages never dropped below 5 percent till 2009, and over the long haul have averaged about 8.5 percent. This is an important reminder not to take recent interest rate levels for granted - a return to more normal conditions would likely mean a return to higher mortgage rates.
On the surface, economic and inflation indicators are weak enough to suggest there is no immediate threat of upward pressure on home mortgage interest rates. The other two factors, however, suggest that mortgage shoppers should be wary. History indicates that mortgage interest rate levels are unusually low, and a big reason for that - Federal Reserve policy - is in transition.
Thus, while there may not be an obvious spark to higher mortgage rates in the current picture, the potential for higher rates between now and year-end is quite strong. Mortgage shoppers today would be wise to lock in rates, by getting commitments as soon as possible, and by favoring fixed over adjustable-rate mortgages.