Mortgage Rates: Hike Not A Sure Bet

Mortgage Rate Hike Not A Sure BetMortgage rates have turned higher during the past few weeks and with a December Fed rate hike predicted by many it seems possible that millions of Americans are about to face steeper real estate costs.

The catch is that by “steeper” we may not see much of an increase at all. Despite whatever it is that the Fed will do or not do the fact remains that trillions of dollars worldwide are invested with negative interest rates. This means that vast sums of money remain available for investment in the US housing market at rates which are as low or lower than the levels we have today. No less important, as long as much of the world’s economy remains dicey this situation will not change regardless of what action the Fed takes in December.

The argument is made that an increase in mortgage interest rates will actually have a beneficial real estate impact because with higher rates lenders will be more willing to loosen credit and thereby make financing available to an increased number of borrowers. There is logic to this view, however it is not especially clear that mortgages are in anyway difficult to now obtain. Ellie Mae, in its latest Origination Insight Report, says that 66.8 percent of all loans are now being closed, the highest closure rate in more than a year and not exactly evidence of tight credit.

Moreover, if the Fed actually does raise rates and mortgage interest levels increase it will be interesting to see just how long such higher rates remain in place. The Fed does not set mortgage rates and more and more home financing comes from nonbanks which are not part of the Fed system. Surely mortgage rates will increase with the anticipation of a Fed rate hike and if such an increase actually takes place then one can expect that mortgage rates will be higher than in the recent past. But, as a result of supply and demand there may not be any reason for mortgage rates go up in the longer term given that lenders today are stuck with enormous sums of cash that cannot be loaned at even 0 percent.

Consider what happened when the Fed ended its quantitative easing (QE) program in 2014. Rates rose in anticipation of the event, rates stayed high for a few weeks, and then rates fell back. All the chatter regarding how an end to the Fed program would cause mortgage rates to soar turned out to be just a short-term blip on the financial radar.

Mortgage Rates & Reality

We might look at what the market is actually doing. Last week Freddie Mac reported that interest levels for 30-year, fixed-rate prime mortgages stood at 3.87 percent. A year ago the cost for the same financing was pegged at 4.02 percent – 15 basis points higher than today.

The Bureau of Labor Statistics just reported that employment had gone up by 271,000 jobs in October, a very good increase as such things go and enough to energize the pro-hike contingent.

However, in looking at the actual release you have to wonder if people read much past the first paragraph. If they did they would note that the definition of a “job” is a lot less than 40 hours per week. Instead, according to the BLS, the typical worker was paid for 34.5 hours of labor per week. Imagine if the average workweek was actually 40 hours. Would we really need an additional 271,000 workers? Or, are we padding the numbers with jobs that would be unnecessary if we really had something close to full employment?

At the start of the year virtually every economist, association and banker predicted and maybe hoped that interest rates this year would rise significantly. At some point the string has to break and rates really will increase, but for the moment the economy remains remarkably fragile and higher rates will hardly help.

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