Fed rate hike: What does it mean for mortgage rates?
The Federal Reserve hiked short-term interest rates by 0.25 percentage point Wednesday, in line with nearly universal expectations. It鈥檚 the first time the central bank has raised rates in almost a year.
If you鈥檙e a current or would-be homeowner, you shouldn鈥檛 feel rushed into action. In fact, the biggest moves in mortgage rates have likely already happened 鈥� and the Fed had nothing to do with them.
But the Fed鈥檚 action, and the expectation that it will raise rates again in the coming months, has important implications for聽, as well as your ability to buy a home or聽.
What happened after the last Fed rate hike
Rates on 30-year fixed-rate mortgages averaged聽3.97% prior to the last Fed rate hike on Dec. 16, 2015, according to Freddie Mac. Many experts predicted they鈥檇 move higher, but after briefly touching 4% just before the end of last year, rates retraced their steps through 2016, falling below 3.5% in July through聽October.
And then came the presidential election. Every mortgage rate forecast flew out the window when rates soared above 4%; they鈥檝e remained there ever since.
The Fed can鈥檛 trump Trump
Nothing moves mortgage rates like a surprise presidential-election outcome 鈥� not even the Fed. Brad Hunter, chief economist for HomeAdvisor, a home improvement referral site, expects two聽or three additional Fed rate hikes in 2017, but that mortgage rates will only gradually move higher throughout the year.
However, Hunter says there are three things that could lead to a faster-than-expected increase in interest rates, and they all involve聽the presidency of Donald Trump.
1. Trump might appoint a new Fed chair.听As president, Trump will be able聽to appoint two governors to the Federal Reserve Board right away and replace Chair Janet Yellen when her term ends in early 2018.
During the campaign, he聽said that the Fed has been holding interest rates at abnormally low levels. And if he builds a Fed that takes a more aggressive and activist approach to monetary policy, that would increase the likelihood of higher interest rates.
鈥淥n the other hand, Mr. Trump has also said that he 鈥榣ikes鈥� low interest rates, so his ultimate course of action on this matter is unclear,鈥� Hunter says.
2. Trump might cut taxes.听That could result in higher budget deficits, especially combined with his infrastructure spending plans.
鈥淎 higher budget deficit would force more bond issuance, which would tend to push bond prices down and interest rates higher. Also, if the fiscal stimulus causes the economy to accelerate, that could mean additional upward pressure on rates,鈥� Hunter says. 鈥淎nd in this circumstance, the higher rates would be a reflection of positive news rather than negative.鈥�
3. Trump might renegotiate the federal debt.听The president-elect has floated a few聽ideas, including buying existing U.S. Treasuries at a discount. That debt would have to be retired 鈥� or replaced with lower-interest new bonds 鈥� in effect refinancing the debt. He also mentioned 鈥渞enegotiating鈥� federal debt, a move just short of defaulting on what have been the world鈥檚 most secure bonds.
Trump has since backed down from these proposals. But 鈥淚f such an unprecedented event were to happen, investors worldwide would suddenly start to view our debt as risky, demanding to be paid a higher rate of interest,鈥� Hunter says. 鈥淭hat would in turn further add to the deficit. Long-term rates, including mortgage rates, would go up.鈥�
The 2017 housing and mortgage rate forecast
Barring such events, forecasters predict a trade-off: Rising mortgage rates will聽be accompanied by an improving economy and the potential for higher wages.
In its latest outlook, Freddie Mac said it expects to see 鈥渟ome additional interest rate increases following the recent movements.鈥� The company, which provides capital to the mortgage market by buying mortgage loans from lenders, predicts聽聽will average 4.2% at the end of 2017.
Mike Fratantoni, chief economist for the Mortgage Bankers Association, also expects a steady climb. 鈥淲hat happened in the past month, we were looking to occur over the next year,鈥� he says. 鈥淚 think we鈥檝e seen the big move already.鈥�
Both the association and Freddie Mac are forecasting fewer homeowners will聽go through the聽听辫谤辞肠别蝉蝉.
鈥淲e鈥檝e already seen some pretty clear signs that we鈥檙e on our way to that trajectory,鈥� Fratantoni says. 鈥淚n the last month, we鈥檝e seen mortgage rates go up about half a percentage point, [and] we鈥檝e seen refi application volume drop 28%.鈥�
On the other hand, the association projects $1.10 trillion in purchase mortgage originations聽鈥� homebuyers taking out new mortgages 鈥斅燿uring 2017. That鈥檚 an 11% increase from 2016.
The 2017 forecast from TransUnion, the credit analytics company, agrees that lower unemployment rates and a growing median household income will allow more first-time homebuyers to enter the market next year.
鈥淲e believe with improved economic conditions we could see nearly 3聽million聽聽in 2017,鈥� Joe Mellman, vice president and mortgage line of business leader at TransUnion, said in the forecast.
And in the coming year, would-be buyers and mortgage refinancers should still have the benefit of historically low interest rates 鈥� perhaps combined with improving personal finances.
Hal Bundrick is a staff writer at NerdWallet, a personal finance website. Email:聽hal@nerdwallet.com. Twitter:.
This article first appeared in .听
