Every presidential election comes with some changes, and the effects of the most recent election cycle include higher mortgage interest rates. With the CHOICE Act still under review, many financial experts wonder if changes in the near future will reduce the number of smaller banks and lending institutions. President Trump’s policies are expected to make economic growth speed up, and the Federal Reserve is increasing the cost of borrowing. When this happens, mortgage interest rates also rise.
Historic Mortgage Rate Increases
Prospective homeowners and people who are considering refinancing may be biting their fingernails in worry as they watch interest rates go up slowly. Although most younger consumers have been used to seeing steady interest rates for the past several years, rates were much higher several decades ago. In 1981, Freddie Mac reported a mortgage interest rate of over 16 percent. Falling oil prices, a weak real estate market and several financial crises led to skyrocketing rates during the 1980s. Rates had been 7.2 percent or higher in the 1970s.
By 1990, rates fell under 10 percent and continued a steady but slow decline through the late 2000s. In 2013, rates were as low as 3.41 percent. Mortgage interest rates climbed to over 4.1 percent in 2017, and the numbers had not been that high in over a year. Rates were as high as 4.43 percent at one point during 2014 but fell again.
How High Will Rates Climb?
Although rising rates may be scary right now, the good news is that economists and financial experts do not expect a sharp spike or a long-term substantial increase. Economists predict that the economy will grow by about two percent, which is less than the growth after World War II that led to a spike in loan interest rates. With good but slower economic growth, they predict that rates during the fourth quarter of 2017 will be about 4.6 percent. However, they said that rates could surpass five percent by the time 2018 arrives. They pointed out that there are four crucial topics to consider, and these issues could cause rates to continue increasing.
- Fiscal Stimulus
If government spending and tax cuts are addressed as promised, this could lead to a larger deficit. The stimulus would promote economic growth but would also lead to inflation. If wages were increased to keep up with inflation, it may not be a major issue. However, it could trigger a rise in long-term mortgage interest rates.
If the strict lending standards that were enacted after the financial crisis were loosened, it could create changes with the Consumer Financial Protection Bureau. Although changes would minimally impact mortgage rates, it would impact consumer access to credit.
Experts say that although there is talk of reforming entities such as Freddie Mac and Fannie Mae, the likelihood of that happening is about 50 percent. If there is a successful reform, it would result in mortgage interest rates increasing. This is because private sector capital costs are reduced when the government backs the bonds issued by these entities, and they will want some extra compensation for the increased risk.
- Fed Chair Changes
Although this is not the biggest factor impacting rates, it could become an issue in 2018 when a current Fed chair position is vacant. Most home buyers are concerned with fixed 30-year mortgages, which are not impacted greatly by the Federal Reserve. Experts point out that there is a possibility of changes with a new chairperson. However, drastic changes are unlikely.
How Rate Changes Affect The Housing Market
In the past, buyers could calculate the cost of a home to see their expected monthly payment, which is a major determining factor in buying. When even the smallest rate increase is factored into a 30-year mortgage, it could alter the final cost of the home considerably enough to change a buyer’s mind. If home prices that were once attractive become too expensive with higher interest rates factored in, borrowers may choose cheaper properties or retain their current residence.
Rising mortgage rates also make people less likely to put their home on the market and take the risk of letting it sit for a long time. While some popular residential areas may not be as affected, this will be a big consideration for people in cities with poorer economies and people in rural areas with slow growth.