With Greg McBride, Senior Vice President & Chief Financial Analyst for Bankrate.com
Mortgage Rates in 2017: Are they Heading Up, Down, or Flat?
Greg McBride, Chief Financial Analyst at Bankrate.com, returns today to talk about mortgage rates, the federal funds rate, housing markets, and the economy, in general, and where they all might be headed in 2017. Naturally, Greg is an expert on these and other topics, and we’re lucky to have him here to share his insights and expectations about the coming year.
Before turning towards a more forward-looking trends analysis (including Greg’s forecast for mortgage rates in 2017), the conversation begins with a look at mortgage rates and the Federal Reserve’s modest rate hike at the end of 2016. On December 14, 2016, the Fed raised the overnight “federal funds rates” by 0.25%—only the second of such raises in almost a decade. This immediately caused a larger spike in rates (aka yields) on 10-year notes and 30-year bonds and this, in turn, elevated mortgage rates, which are tied to these longer-term government securities. Building on a rise that started in October, mortgage rates ended the year up 0.75%, an increase that has inflicted a certain amount of pain on potential home buyers. Granted, this is coming on the heels of summer mortgage rates that scraped record lows of 3.5%, so, in that context, the Q4 rise is not a major game changer.
Trump and the Prospect of Fiscal Stimulus and Rate Inflation
Greg notes how unusual and, indeed, how unprecedented it was that every week in Q4 2016 saw mortgage rates creep up (except for one week when rates were flat). Steve wonders whether this might be evidence of an “inflection point”, where a short-term trend becomes a long one. It’s important to recall that mortgage rates were rising before the fed funds rate change, and Greg attributes this, in large part, to an expectation that Trump will follow through on his promises to cut taxes and invest in large-scale infrastructure spending. These stimulus programs, if and when they arrive, should accelerate economic growth (GDP), add heat to an already strong stock market, and add to inflationary pressures. This would also shift bond prices lower and yields higher on all securities including mortgage rates in 2017.
Despite these rumblings of higher rates fueled by economic expansion, Greg is optimistic about where mortgage rates are headed in both the short term and for the remainder of 2017. He points out that rates have pulled back slightly already in 2017 (from 4.3% to 4.2%) and expects that they will bounce around the 4-4.5% range for the foreseeable future. He also expects that any correction in stock markets, international financial crisis, or a broader downturn in GDP will drive mortgage rates lower. This is because, reacting to fear of falling asset prices in a so-called “flight to safety”, investors will rotate out of stocks and other equities and into bonds. Higher demand for and thus prices of bonds leads to lower yields and hence cheaper mortgages. This could present an opportunity for buyers to lock in rates under 4% and for homeowners to refinance at those rates as well.
Treasuries Rates and Deeper Economic Trends
Greg makes a case that the bulk of the rise in interest rates has already been priced in by the market. Looking deeper into the dynamics shaping the economy, he sees volatility emerging from conflicting trends: on the one hand, fiscal stimulus, and, on the other, weak productivity gains and an aging population. The uneven growth that would result from these conflicts is not a departure from the pattern over the last few years. As we’ve seen in the recent past, Greg expects mortgage rates to continue bouncing up and down. In fact, he takes a step beyond this mixed forecast and states that he thinks there’s a good chance that rates could again fall below 4% given the likelihood that some kind of market upheaval—even an overseas event—will send volatility soaring and scare investors back into US Treasuries.
In the latter part of their conversation, Steve and Greg discuss the state of credit and bank lending at the beginning of 2017. On the question of whether credit has loosened up and if banks are underwriting new loans, Greg dismisses the often-heard lament that banks are sitting on the sidelines, repairing their balance sheets and being stingy with loans. He believes that credit availability, including mortgage lending and car loans, has rebounded a lot since the market meltdown of the late 2000s. However, he does concede that small business owners have been left out of the credit expansion.
Savers and Low-Interest Rates
As for the plight of savers that have been hammered in the low-interest rate environment fostered by the Federal Reserve, Greg is not particularly rosy about their prospects. His prediction is that there will be very modest improvements to savings account and CD rates, with perhaps more growth in the second half of the year. Unfortunately, these gains could very well be offset or even eclipsed by inflation. At the end of the day, the Fed’s decisions to raise rates or keep them flat will determine the direction of savings rates, and Greg sees no compelling reason why the Fed will abandon its traditional cautiousness about rates. Don’t expect multiple Fed fund rate hikes this year, Greg suggests, and don’t expect mortgage rates in 2017, yields on securities, or savings instruments to move strongly or lastingly up or down.
Disclosure: The opinions expressed are those of the interviewee and not necessarily United Capital. Interviewee is not a representative of United Capital. Investing involves risk and investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions. Content provided is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered tax, legal, investment advice. Please contact your tax, legal, financial professional with questions about your specific needs and circumstances. The information contained herein was obtained from sources believed to be reliable, however their accuracy and completeness cannot be guaranteed. All data are driven from publicly available information and has not been independently verified by United Capital.
Steve Pomeranz: I’d like to welcome back my next guest. He’s Greg McBride with Bankrate.com. Greg is the Senior Vice President, Chief Financial Analyst, and providing analysis and advice on personal finance for, as I said, Bankrate.com. So I want to welcome him to the show.
Hey, Greg, welcome back.
Greg McBride: Thank you so much, Steve. I appreciate your having me and Happy New Year.
Steve Pomeranz: Happy New Year to you. Thank you for telling me that. I want to talk about mortgage rates. We’ve seen quite an increase in interest rates. The Fed has increased their very short-term rates about a quarter of a point, but, in the bond market itself—which is not controlled by the Fed—we’ve seen a significant rise in the yield on 10-year bonds, the treasury bonds, and the 30-year treasury. What’s happening with mortgage rates based upon the interest rates that we’ve just seen?
Greg McBride: Mortgage rates are, of course, very closely correlated with the yields on those longer-term bonds. So, during the fourth quarter of 2016, when long-term bond yields spiked up, we saw the same thing with mortgage rates. Mortgage rates were up about three-quarters of a percentage point during the last two and a half months of 2016.
What was unprecedented, really, Steve, was the fact that for the first time ever during a calendar quarter, we did not see mortgage rates decline on any given week during a calendar quarter. That’s the first time we’ve ever seen that. They were up every week except for one, and the one week they weren’t, they were flat. That was the story as we wrapped up 2016— mortgage rates, bond yields, everything moving up sort of on this expectation that we’re going to see big government stimulus and we’re going to see faster economic growth.
As we come into 2017, we’ve already started to see mortgage rates pull back a little bit, and I think that’s kind of a harbinger of what we’re going to see throughout the year. Mortgage rates are going to bounce up and down. I think you’re looking at your 30-year fixed rate between 4 and 4.5% for the bulk of the year and just kind of gyrating within that range with an end-of-year higher than where we started, at about 4.45%, but, again, a lot of ups and downs during the course of the year. And if there’s a market sell-off or just any kind of economic stumble along the way, you can expect mortgage rates will pull back below that 4% mark. It may be brief, but I think that’s good news for people that may have missed that refinancing opportunity in 2016, so they can pounce at that point.
Steve Pomeranz: That’s a lot to digest, so let’s go through that a little bit. We saw mortgage rates hit—I don’t want to go to the very low—but it seemed to me that they were around three and a half to three and seven-eighths for the longest time. Would you agree with that?
Greg McBride: Yeah, during the summer months, absolutely, and we were flirting with record lows, to put it in that context.
Steve Pomeranz: Yeah. Now, I guess they shot up between four and four and a half. Where are the rates right now?
Greg McBride: We had topped out at about 4.3% toward the latter part of 2016. Now, they’ve since pulled back to about 4.2%.
Steve Pomeranz: Okay, so now we have mortgage rates…now it’s a little bit more expensive for people to buy homes, and I guess, at some point, we’re also seeing home prices increase as well, so there’s this kind of double whammy cheap hydrocodone overnight delivery going on because of this. But you said something that caught my ear, and that was that there was not one week where you saw rates actually—what, come down? Was that what you said?
Greg McBride: Yeah, exactly, not one week where rates declined during the calendar quarter, the fourth quarter of last year.
Steve Pomeranz: The whole quarter! It sounds to me that’s like an inflection point. There’s something different about the trend, and now maybe the trend is higher. Now there was a lot of emotion after the election. Stock market rose very dramatically. Interest rates responding to the prospect of higher GDP growth rose and higher GDP growth also means possibly higher inflation, so a lot of bonds sold off. Interest rates rose. Now, people are wondering are they going to continue to rise throughout 2017, but I’m hearing in your view, you don’t think so.
Greg McBride: No, I think the bulk of that move came already. What we were seeing during the fourth quarter of last year, I think that was really the inflection point, not necessarily the tip of the iceberg. So I think as we move into 2017, I think you are going to see a lot of volatility because you’ve got, yes, the prospect of faster economic growth because of government stimulus and tax cuts and things like that, but you’ve also got the reality that we’re still a slow-growth economy.
We still have an aging population. Productivity growth, which is really how … it’s really the key ingredient to increasing the standard of living… is dismally low. You’ve got those kinds of competing factors, and so I think 2017 is going to be a year where you’re going to see some uneven economic growth, much like we’ve seen the past few years, and, as a result, I think you’re going to see a lot of ups and downs, particularly with regard to mortgages.
Steve Pomeranz: My guest is Greg McBride, Chief Financial Analyst for Bankrate.com. You mentioned this word very quickly as you were speaking before, flight to quality, which is something that happens if there’s a blip in the economy or some worry about the economy. Institutions pull money out of stocks and they have to put it somewhere, so they stick it into U.S. Treasuries, which drives the price up and the yields down. If the past is any prologue to the future, we’ve had quite a bumpy ride for the last five years. There’s nothing pointing to 2017 as being any different, so maybe expect this flight to quality.
Greg McBride: That’s my expectation, yeah. You hear a lot of people say, “Well, you can just kiss low rates goodbye. It’s a thing of the past, and we’ll never see those lows again.” I’m pretty skeptical of that. I do think that at some point during 2017, we are bound to see that flight to quality from whatever reason. It could be an economic stumble. Maybe it’s a geopolitical crisis. It could be something on the other side of the world. We saw that a couple of times last year.
Steve Pomeranz: Yeah.
Greg McBride: So even things that really have nothing to do with the U.S. economy, it could be something like that. Those types of things are good news for mortgages historically. They’ve produced great opportunities for things like refinancing or really a great windfall to that homebuyer who, all of a sudden, sees mortgage rates drop and their payment ends up being less on that new home than they thought it was going to be.
Steve Pomeranz: I wonder if the access to loans has been made easier recently and there’s a trend of easier money from the banks. You have any comment on that?
Greg McBride: Well, yeah. Any time people talk about credit being tight, I just kind of roll my eyes, because in an environment where people with credit scores as low as 620 can get a mortgage with just 3% down, I think it’s kind of silly to be talking about how credit is tight. Now the exception to that is small business owners. For the average person who has paystubs and has tax returns and gets a regular paycheck and can document their income that way, yes, I think credit availability is really, really solid as long as they have respectable credit and a little bit of money to put down. It’s the small business owner who, from the documentation of income standpoint, who has been on the outside looking in, and that’s only improving at a very slow pace.
Steve Pomeranz: So, if I’m going out for a new-car loan or even a loan on a used car, I really shouldn’t have too much problem.
Greg McBride: Exactly. Credit availability’s really good, and the competitive landscape has really benefited car-buyers. The rates we’ve seen over the last year or so are the lowest we’ve ever seen, and this is at banks and credit unions alike, so while I do expect rates to trickle higher a little bit during 2017, it’s not going to be something that’s an impediment to car-buyers in any way. Just to put this in context, a difference of a quarter percentage point on a $25,000 car loan, it’s three bucks a month. So, nobody’s going to end up taking the bus instead of buying a car because rates went up.
Steve Pomeranz: Gotcha. Savers, those who don’t like the stock market, those who put money regularly in their savings accounts, checking accounts, have really been under attack for many, many years now. We had this little rise of interest rates with the Fed. Are savers getting any relief in 2017?
Greg McBride: They haven’t gotten it yet, but I do think, for the first time in many years, that 2017 is going to be a year where savers do start to see some improvement. Now I think that improvement’s going to be skewed for the back half of the year. I think the Fed is going to have to raise interest rates a couple of more times before you start to see broad-based improvement across things like savings accounts and certificates of deposit, but, by year end, when we chalk it up, I do think it’s going to be a year with some pretty modest improvement. For example, the top online savings accounts, which right now pull in about 1.1%, I think by year end they’ll be up at 1.5%.
Steve Pomeranz: Oh, really?
Greg McBride: And the top-yielding CDs, which right now, if you go all the way out to five years, you might pull in a little over 2%, I think, again, you’ll get some modest improvement on CDs as well. So, by year end, I think those CDs will be pulling in about 2.5%, so modest improvement. Of course, the cloud, there’s a cloud to every silver lining, right?
Steve Pomeranz: Yeah.
Greg McBride: And that is you’re going to have to keep your eye on inflation. So I do think that, yes, I think savings returns will improve, particularly in the back half of the year. Hopefully, it’s not just a moral victory if inflation moves higher as well.
Steve Pomeranz: It sounds great to get 1.5% on the money market, and if that does, in fact, come to being. But, again, inflation’s running at 2-2.5% right now with the prospect of it running even higher, so be careful there. Make sure you don’t have all your money sitting in those risk-free savings accounts because you’re not going to keep pace with inflation.
Listen, you had mentioned that the Fed could raise rates two times next year. A lot of people are thinking it’s three times. Do you think that’s crazy?
Greg McBride: I don’t think it’s crazy. I’m very skeptical of it. This time a year ago, the Fed was projecting that they were going to raise rates four times in 2016. They ended up doing so once. The Fed has this long-held tradition of they overestimate where they think the economy’s going to be. They overestimate how much interest rate activity they think they’re going to be involved in, and then they spend the rest of the year ratcheting that back, and I don’t see any difference this year. The Fed says they’re going to raise rates three times. There are a lot of people out there that are projecting three or four or more rate increases in 2017. I’ll believe it when I see it. I’ve got the Fed raising rates two times this year, and, again, because I think a lot of the factors that we saw in play in 2016 are going to carry through to 2017.
Steve Pomeranz: Even the Fed just said that they have a heightened sense of economic uncertainty based upon, I think, the change in the administration and some of the comments that have been made, so I don’t think they’re going to be quite so willing to start raising rates so fast.
Greg McBride: That’s exactly my view…is that there were a lot of things over the past few years that caused the Fed to just hold off a little bit longer, and I don’t think that those things have gone away. I think in 2017, I think there’s going to be plenty of those things that make them sit back and say, “Well, you know, let’s just wait another six or seven weeks until the next meeting, and then we’ll take another look at things.” So as a result, that’s why I’m betting the under when it comes to how active the Fed’s going to be in 2017.
Steve Pomeranz: My guest, Greg McBride, Chief Financial Analyst for Bankrate.com. To find out more about Greg and to hear this interview again, don’t forget to join the conversation at Stevepomeranz.com. That’s P-O-M-E-R-A-N-Z, Stevepomeranz.com. Thanks for joining me, Greg.
Greg McBride: Always a pleasure, Steve. Thanks for having me.