Access to historically low mortgage ratesis one of the best things about buying a home today. But is it here to stay? Experts don’t think so, hinting that rates may hike sooner than later.
Mortgage Bankers Association’s chief economist Michael Fratantoni says that mortgage rates “will get higher, but not that much higher” when he spoke at the MBA’s recent annual convention in Denver.
Fratantoni believes that the change will be gradual. It can be recalled that rates plunged to a historic low last year (as low as 3 percent) after Britain voted to exit the European Union. More than a year after the separist vote, rates have inched a percentage forward. The economist projected that rates will maintain its current pace, forecasting an average of 4.6 percent in 2018 and 5 percent in 2019. In 2020, mortgage rates are expected to be at 5.3 percent.
See today’s mortgage rates!How do we visualize such economy?
Analysts say that the economy must be strong enough to push unemployment rates down. Wages must be increased to allow for more players or borrowers to enter the market.
Wage increase will drive inflation up, resulting to higher borrowing cost.
The Fed, which holds $1.8 trillion in mortgage-backed securities plans to reduce their holdings in the next couple of years, using higher rates as bargaining instruments to entice buyers.
This paints a good picture, especially when we view it from the demand perspective. If the increase in rates is gradual, that will give enough time for new buyers to enter the market (think millennials) while keeping the affordability for current first time home shoppers and investors.
This will however put a strain on the already scarce inventory or housing availability. When supply is scarce, prices will inevitably skyrocket, thus alienating a lot of homebuyers who can no longer afford homes on sale.
Will this affect mortgage volumes?
The MBAsays it will not, though the surge in purchase originations this year is predicted to put a dent on future refi numbers.
Current data may not be agreeing, however. Information from the National Realtors Association ( NAR) show that existing and previous home sales have plummeted to new lows for consecutive months now.
These are interesting charts, given that the economy is generally doing well and unemployment is close to a 17-year low.
Various theories abound, with some enthusiastically postulating that we only need to loosen the pressure in home prices by ramping up construction – something that is easily said than done given the current state of affairs.
Others are more somber in their outlook, saying all the pent up demands have been met and that the housing market may be running out of steam after years of continuous increase.
A deciding factor
While the current rate environment is indeed ideal for home buying, a home buyer also needs to consider a whole menagerie of other factors in order to adequately evaluate his or her position when purchasing a home. When home prices hike twice as fast as wages, a lot of buyers would have to choose between going into a heavy debt, or delaying homeownership until pressure on home prices cool.
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