Mortgage Rate Forecast 2017 – Higher and Higher
Higher and higher. That’s the U.S. mortgage rate forecast for 2017. After years of hovering near record lows, mortgage rates are on the rise. The big question is, how strong will the U.S. real estate market be and how high will U.S. mortgage rates go in 2017? On top of that, how will rising U.S. mortgage rates and President Donald Trump’s housing policies affect first-time home buyers and middle-class and lower-class Americans?
First things first, when it comes right down to it, trying to predict where U.S. mortgage rates are going to go, with any precision, is as tough as predicting where the stock market is going to go.
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With mortgage rates, you have to look at the broader U.S. housing market, interest rates, and economic data, and then roll the dice. Right now, UP is the closest thing to a prediction most are willing to make.
Since the U.S. election, Americans have become more optimistic about the country’s economic future. The belief being that President Trump’s economic policies will be good for corporate America, corporate earnings, and everyday Americans.
Before the U.S. election, 30-year fixed mortgage rates hovered around 3.50%. After the election, mortgage rates increased to 4.30%; since then, mortgage rates have settled into that range.
That said, interest rates are still near their lowest level in years and a far cry lower than the 18% range of the early ’80s. Interest rates will remain low (for now) because the yield on 10-year Treasury notes (which affects 15-year loans) and 30-year bonds (which affect 30-year loans) while rising, are still near historic lows.
The Federal Reserve’s key lending rate impacts the rate banks charge each other. It also affects the prime rate, that is, the rate banks charge their best customers. The lower the yield on Treasurys and bonds, the lower the mortgage rate, the more people can borrow, and the hotter the real estate market. It also means people will spend more for home improvements and consumer products. All of which is good for the economy.
The Federal Reserve left its short-term rates unchanged at its last meeting. There are concerns that while the jobs data looks encouraging, wage growth is non-existent. The Federal Reserve holds its next policy meeting on March 13. The odds of a rate hike are up in the air right now, around 50%.
Even if the Fed doesn’t raise rates in March, it has said rates will be increasing in 2017. Two or three increases of a quarter percentage point might not sound like a lot, but it adds up. And it could negatively impact the already fragile U.S. economy.
10-year U.S. Treasury yields are currently near 2.36% and 30-year bonds have a 2.89% yield. A move to a range between three percent and four percent could result in mortgage interest rates in the 4.75% to 5.75% range.
That will put serious pressure on cash-strapped U.S. homeowners. And it could lead to another housing crisis.
The Birth of the U.S. Housing Crisis
The roots of the financial crisis can be traced back to 2006 when the U.S. housing market topped out in April. The Case-Shiller National Home Price Index stood at 206.61 in April 2006. By April 2009, it had tumbled 31.5% to 141.53.
One year later, the housing bubble popped and the overall U.S. economy weakened.
Over that time, the economy ground to a halt. Businesses and individuals began to default on loans and banks saw their balance sheets shrink. To stave off further economic shock, banks made it more difficult to borrow.
In December 2007, the U.S. entered the Great Recession. It lasted for 18 months. By the beginning of 2008, the effects of the housing bubble and financial crises rattled through the stock market.
During that time, the S&P 500 lost more than half of its value by the time it bottomed in March 6, 2009 at 666.79. The New York Stock Exchange plunged by 60%, while both the Nasdaq and Dow Jones Industrial Average shed more than 50% of their value.
To help avoid an all-out economic collapse, the Federal Reserve initiated its first of three rounds of Quantitative Easing in November 2008.
At the end of 2007, the Fed had around $750.0 billion in Treasury securities. By the end of 2014, its portfolio stood at $4.25 trillion. On September 30, 2007, the national debt stood at $9.0 trillion; on September 30, 2014, it had ballooned to $17.8 trillion. No one is really sure when the U.S. will run a surplus again.
In the aftermath of the Great Recession, artificially low interest rates sent mortgage rates to historic lows; and have not breached five percent since 2009. During the housing crisis, millions of Americans lost their homes.
Between January 2007 and December 2011, more than four million foreclosures had been completed and there were more than 8.2 million foreclosures starts. By May 2012, 3.4% of all homes with a mortgage were in foreclosure. (Source: “How Many People Have Lost Their Homes?” Centre for Research on Globalization, May 17, 2013.)
9.6% of ALL U.S. Properties Still Seriously Underwater
That puts the foreclosure rate during the Great Recession on par, or slightly worse, than during the Great Depression. And it’s not over for many Americans. The stock market may be at record levels and real estate in San Francisco, Los Angeles, and New York are setting record prices, but many home owners are still suffering.
At the end of 2016, 5.4 million properties were seriously underwater; the combined loan amount was at least 25% higher than the properties’ estimated market value. While this is down one million from 2015, it still represents 9.6% of all U.S. properties with a mortgage. In the late 1990s, the number of U.S. properties underwater was around four percent. (Source: “Number of Seriously Underwater U.S. Properties Down 1 Million From Year Ago,” MarketWired, February 7, 2017.)
When properties are underwater, homeowners cannot tap into the equity to invest in education, upgrades, or anything else. The number of underwater homes leads to empty houses and more people choosing to rent instead of buy. This has the unwanted effect of driving up the price of apartments, which makes it even more difficult for people to save up to buy a home.
Those who have mortgages that are underwater cannot rely on any equity to help them out in the event of an emergency. And Americans are already tapped when it comes to savings. Almost half of all Americans (47%) would have to borrow money to pay for an emergency expense of just $400.00. (Source: “66 million Americans have no emergency savings,” CNBC, June 21, 2016.)
With mortgage rates and inflation expected to rise in 2017, it’s going to be very difficult for the average American to make ends meet.
Mortgage Rates Rise as Housing Affordability Plunges
The real estate forecast for 2017 remains robust. This isn’t as good as it sounds.
Demand for existing homes, which accounts for the vast majority of all home sales, is strong amidst tight demand; so too are housing prices. This comes at a time when mortgage rates remain above four percent and wage growth is non-existent.
U.S. existing home sales hit a 10-year high in January despite higher prices and rising mortgage rates. Existing home sales increased 3.3% to a seasonally adjusted annual rate of 5.69 million units. This is the highest level since February 2007. (Source: “Existing-Home Sales Jump in January,” National Association of REALTORS®, February 22, 2017.)
Housing prices are recovering but still need to climb 7.5% to just get to the pre-housing crisis level. The national median home price increased to $250,000 in the fourth quarter of 2016 from $247,000 in the third quarter. During the same time frame, the average mortgage rates edged higher to 3.84% from 3.76%.
Chart courtesy of StockCharts.com
Rising home prices and mortgage rates coupled with lower earnings growth does not bode well for the U.S. economy. Despite the so-called economic recovery, housing affordability in the U.S. is at an eight-year low.
During the last quarter of 2016, 59.9% of all homes sold were “affordable” to families earning the U.S. median income of $65,700. In the third quarter, 61.4% of all homes sold were affordable to median income earners. (Source: “Housing Affordability in U.S. Hits Eight-Year Low,” World Property Journal, February 20, 2017.)
Add it up; rising mortgage rates and nominal home price growth is outpacing income growth, which translates to declining affordability for first time home buyers. This could take a big bite out of the U.S. economy. Housing’s combined contribution to GDP averages 15-18%. (Source: “Housing’s Contribution to Gross Domestic Product (GDP),” National Association of Home Builders, last accessed February 28, 2017.)
Will Trump’s Policies Lead to Another Housing Crisis?
U.S. existing home sales are up but President Trump’s housing policies could lead to another housing crisis. In the U.S., home ownership is part of the American Dream. Not only does owning a home create a sense of belonging and community, it helps property owners, especially lower-to-middle class households, build wealth by accumulating equity. But President Trump’s current housing policies could undermine this incentive.
- Hours after Trump entered the Oval Office, he reversed President Obama’s decision to cut Federal Housing Administration (FHA) insurance premiums by 0.25%. Had Obama’s order been adopted, Americans with $200,000 mortgages would have saved around $500.00 per year. Those with $400,000 mortgages would have saved around $1,000.
The effect was immediate. Total mortgage applications fell 3.2% (on a seasonally adjusted basis) from the previous week. Volume was 18% lower. Trump’s action mainly affected borrowers who can only make small down-payments or have bruised credit scores in the mid-500s. (Source: “Trump’s first housing move tanks mortgage applications 3.2%,” CNBC, February 1, 2017.)
- During the election, Donald Trump said he was going to dismantle the Dodd-Frank Act that was passed in the aftermath of the financial crisis. The act is designed to regulate Wall Street. President Trump believes Dodd-Frank makes it too difficult for American businesses to borrow. Repealing the regulations could, some believe, lead to another financial crisis. (Source: “Dodd-Frank Wall Street Reform and Consumer Protection Act,” U.S. Government Printing Office, last accessed February 27, 2017.)
- In early February, President Trump signed an executive order to review major banking rules. This includes reversing the Fiduciary Rule, which requires advisors to act in the best interest of their clients, as opposed to seeking the highest profits for themselves.
This may sound like common sense, but the lack of ethical guidelines has had serious consequences. In a 2015 speech, Federal Chair Janet Yellen criticized the “distorted incentives” in the financial industry. She said that prior to the Great Recession, the financial sector encouraged households to take on mortgages “they neither understood nor could afford” and facilitated a bubble in the housing market. (Source: “Speech,” Board of Governors of the Federal Reserve System, May 6, 2015.)
With all safety measures removed, the end will justify the means for Wall Street. This means one thing, the bottom line. If it’s business as usual, and by that, we mean pre-financial crisis levels, the chances of another financial crisis becomes all the more real.
Mortgages Are Going Up, So Is the Risk of Another Financial Crisis
Are mortgage rates going down in 2017? No. Borrowers addicted to record low interest rates are going to have to contend with higher mortgage rates in 2017. This will stretch thin the budgets of millions of cash-strapped Americans.
What will happen to mortgage rates in 2017? The Federal Reserve will raise its short-term lending rate two or three more times this year. That should lift mortgage rates to a range of 4.75% to 5.75%.
That said, mortgage rates could be volatile because of uncertainty around Donald Trump’s housing policies and financial regulations. A loosening of credit will make it easier for homeowners to borrow, whether they’re really qualified to or not. It will also make it easier for less scrupulous advisors to promote risky investments.
Moreover, easing regulations while housing prices are rising will only increase the risk of another housing bubble. This sounds a lot like the financial markets before the 2008 financial crisis and housing bubble.
An indebted nation with little savings, and a huge number of underwater mortgages cannot withstand rising mortgage rates. Nor can it necessarily withstand some of President Trump’s housing and economic policies.
