Mortgage Rates – Where Are They Headed?

As we all are painfully aware, mortgage rates have risen by more than a full 1 percent in the past year. A stronger economy and the Federal Reserve’s interest-rate hikes are the cause of these higher rates. The economy is still currently growing in many sectors and the Fed is expected to continue to raise rates again this year, with the next hike expected the week of September 24, and perhaps another hike again in December. 

The Fed rate hikes tighten monetary policy and, as a result, increase borrowing costs for businesses and individuals. Mortgage rates are higher, as is everything from car loans to credit cards. Higher rates reduce affordability, which in turn will slow down the economy. When the economy begins to slow down and move into a recession, the Fed will change direction and start to reduce rates in order to restimulate the economy. When this happens, mortgage rates will decrease again. 

While many experts predict that the next recession will occur sometime in 2020, others say that it could be sooner. Trade wars can be very damaging to our economy, and if that happens, the economy will decline more rapidly. Geopolitical risks are also a large instigating factor, as we exist in a global economy. Today’s yield curve, which tracks the difference between the two-year and ten-year bond, has flattened, with the difference between the two standing at just .26 percent. A year ago, it was .8 percent! As the difference between the two narrows and perhaps inverts, where short-term borrowing costs are more expensive than long-term, that is a historically reliable indicator that a recession is in the offing. 

I believe that we will see the next recession in 2019.  

What does that mean for someone who is looking to close on a new home in the next six months? If you are not closing until the first quarter of 2019, I would strongly suggest that you consider looking at an adjustable rate. Right now, the difference between a 30-year fixed and a 5-year adjustable is almost a full percentage point. If you were hoping for that 4 percent 30-year fixed, the opportunity will arise again. And the savings by going into an adjustable rate can easily pay for the cost of refinancing when rates come back down. If you were to have taken an adjustable rate over the past 20 years, you would have done better rate-wise the entire time with an adjustable rate versus a fixed rate. But if you are keen to end up with a fixed rate, don’t worry; rates will eventually come back down. 

-Melissa Cohn