Mortgage rates are down slightly from a December high of 4.7 on a 30-year fixed-rate mortgage, but many analysts are predicting a steady rise in rates through 2014. While still at historic lows, many factors are expected to drive mortgage interest rates up this year.
The Fed’s role
The main factor that is anticipated to cause an increase in mortgage interest rates is an expected wind-down of stimulus activity by the Federal Reserve Bank. On the heels of the departure of its leader, Ben Bernanke, the Fed announced it would continue tapering stimulus activity by $10 billion in monthly spending on bond purchases, bringing its stimulus spending down to $65 billion per month. This gradual shift eased fears that ending stimulus too quickly would curb economic growth.
The move by the Fed suggests an optimism about economic conditions despite a weak jobs report in January. The Fed is looking forward to continued growth and a strong dollar. In a statement, they described a mix of positive and negative indicators in the economy as reasons for tapering gradually. “Labor market indicators were mixed but on balance showed further improvement. The unemployment rate declined but remains elevated. Household spending and business fixed investment advanced more quickly in recent months, while the recovery in the housing sector slowed somewhat,” the statement said.
Another kind of tapering is also going on, but this one comes directly from within the housing market. The decision to require Fannie Mae and Freddie Mac to charge higher fees to some low-income buyers has been delayed, but new rules require a more stringent process of screening buyers. The increases in fees were developed to help pay for the government insurance which guarantees the loans against default but delayed in an effort to avoid slowing down the housing market.
Since fewer people may qualify for Federal Housing Authority (FHA) loans, which are backed by Fannie and Freddie as a result, more private lenders may be able to compete for some of Fannie and Freddie’s large market share and charge higher rates. Currently, the two mortgage-backing agencies originate about 2/3 of all new home loans.
FHA loans at rates as low as 3.5 percent are still available, but fewer people will qualify for those loans.
Collectively, these moves may cause a slowdown in housing sales activity around the country. In December, many lenders reported a drop in new mortgage applications as well as decreased refinancing activity but numbers in January are up. Whether a slightly higher rate in December kept the number of applications down is unclear.
If rates increase substantially and loans become harder to get, the housing sector may see declines in new applications. In turn, a sluggish market could spell trouble for banks, even though they may see a greater profit on some loans in the form of higher interest.
In some markets, demand exceeds the number of homes available, so it won’t spell trouble for banks everywhere. In these markets, builders are expected to start more new construction to meet the demand, and robust housing market activity could also help mortgage interest rates creep upward.
For information on current mortgage refinancing rates, visit our refinance page.