Mortgage rates have slowly risen over the last three months — albeit with some weekly declines from time to time. But if the mortgage market continues on this trajectory, it’s not clear that Americans will be willing to stomach higher interest rates for home loans.
Similarly, the 15-year fixed-rate mortgage increased five basis points to an average of 3.19%, according to Freddie Mac. The 5/1 adjustable-rate mortgage was the outlier this week, dropping three basis points to an average of 3.36%.
Has a ceiling formed on mortgage rates?
Freddie Mac anticipates that mortgage rates will continue to increase as we head into 2020. The Federal Reserve signaled that it will keep interest rates steady. Mortgage rates, on the other hand, generally track the direction of the 10-year Treasury note. But the 10-year Treasury yield and mortgage rates alike can be influenced by the central bank’s decision-making.
“With Federal Reserve policy on cruise control and the economy continuing to grow at a steady pace, mortgage rates have stabilized as the market searches for direction,” Sam Khater, Freddie Mac’s chief economist, said in the report. “The risk of an economic downturn has receded and, combined with the very strong job market, it should lead to a slightly higher rate environment.”
‘We have an entire generation of buyers coming of age in an era of rates under 4%.’
How high mortgage rates go may depend on Americans’ appetite. Last November, mortgage rates reached a seven-year high just shy of 5%. And over the course of 2018, mortgage rates had increased to that level after having started the year below 4%.
“That’s a rapid increase in mortgage rates,” Michael Fratantoni, chief economist for the Mortgage Bankers Association, told reporters at an industry conference in October. “You saw affordability really impacting potential buyers.”As a result, mortgage rates quickly started to decline. Less than a year after reaching that seven-year high, rates fell to a three-year low well below 4%.
While mortgage rates have not eclipsed the 5% threshold since 2011, historically they’ve been much higher than that. In the 1990s, interest rates on home loans hovered between 7% and 9% — and in the 1980s, rates at one point exceeded 18%.
“There’s a lot of psychology baked in,” said George Ratiu, senior economist at Realtor.com. “We have an entire generation of buyers coming of age in an era of rates under 4%.”
What’s preventing mortgage rates from rising even higher?
There are a number of factors preventing mortgage rates from increasing substantially.
“It’s made the monthly mortgage payments manageable,” he said. “But if mortgage rates go from 3.5% to 5% or higher, given where prices are right now, markets that are already borderline unaffordable become much more so.”
If home prices don’t come down, income would need to catch up for people to be able to afford higher rates, Ratiu said.
‘If mortgage rates go from 3.5% to 5% or higher, given where prices are right now, markets that are already borderline unaffordable become much more so.’
The state of the economy is another factor. Overseas, central banks have slashed rates to zero in the face of economic weakness in recent years. And while the Federal Reserve’s outlook for the American economy has improved, it has not gotten so rosy that the central bank would consider raising rates. Mortgage lenders, therefore, would find it tough to justify hiking rates much more, Ratiu said.
But mortgage rates above 5% aren’t an impossibility. Fratantoni suggested that if the increase in rates were more gradual, Americans would adjust to the new normal much like they did when rates came crashing down during the post-recession recovery.
“If we were at 5% and stayed there, people would adjust their expectations about the size of home they can buy and set up things appropriately,” Fratantoni said.
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