Interest rates continue to escalate post-election, with the 30-year fixed-rate conventional mortgage hitting 4.03 percent in week ending November 23, 2016 – the first time above 4.0 percent this year and also the highest rate recorded thus far in 2016. The last time that 30-year rates traded at this or a greater level was July 2015.
The data are taken from the weekly Freddie Mac Primary Mortgage Market Survey (PMMS), which has been ongoing since 1971. The survey currently relies on a sample of approximately 125 lenders of all types. In addition, the survey includes Adjustable Rate Mortgage Loans along with fees and points. To learn more about the survey click the following:
Description of PMMS http://www.freddiemac.com/pmms/abtpmms.htm
Historical PMMS Rates http://www.freddiemac.com/pmms/pmms_archives.html
Since the week prior to the election, 30-year rates have risen from 3.47 to 4.03 percent, a gain of 56 basis points over the four-week period. In the 987 weeks since the start of 1998, 30-year mortgage rates have risen more than 55 basis points just 13 times (1.32 percent of time). In the past four weeks 15-year fixed-rate loans increased from 2.78 to 3.25 percent, up 47 basis points. This level of increase, or more, has occurred in 21 of the past 987 four-week periods, or 2.13 percent of the time. The following chart shows both the 30- and 15-year rates reported by Freddie Mac weekly year-to-date.
For the first time in a decade in this blog, also added is the Adjustable Mortgage Rate (ARM) as reported by Freddie Mac. Despite being at 3.12 percent versus 4.03 percent compared to the 40-year fixed-rate loans (91 basis points less), ARMs made up just 5.2 percent of all loan applications for the week ending November 18, 2016, according to the Mortgage Bankers Association. The actual loan rate quoted by Freddie Mac is for a 5/1 ARM, a hybrid product. This loan has a fixed rate for the first five years and then adjusts annually (hence the 1) after that period. For ARM rates quoted by Freddie Mac, the adjustment is based on changes in 10-year Treasury yields. Not all ARM loans in the U.S. are based on Treasuries, however, with many changing with respect to Libor – the London Interbank Offered Rate. It is the rate that banks offer to loan money to other banks.
The next graph shows the difference in interest rates between 30-year fixed-rate loans and the 5/1 ARMs. This spread between the two is a function of expected changes in the yield curve.
The next chart plots the 10-year constant-maturity Treasury yields year-to-date on a weekly basis. Since residential mortgage rates are reported on a weekly basis ending Wednesday, the 10-year Treasury yields are the prior week average also ending on Wednesday. The four-week increase was 56 basis points, identical to the 30-year residential interest rate rise.
So where are interest rates heading from here? Once again, I believe that the overall trend is up over the long-run, but no doubt with some weeks trending downward. Just as with the TINSTAANREM clause — There Is No Such Thing As A National Real Estate Market. Interest rates vary. Naturally, greater risks typically are correlated with higher interest rates. This is not always true, however. Even when the risk is the same, as with U.S. Treasuries, the duration (the length of the loan) of the investment alters the risk premium. Remember, a Treasury is simply a loan to the U.S. government for a specified period of time (duration) at a set return.
The duration (length) of the loan assigns the name to the Treasury:
1-Year or Less – Treasury Bill
2 to 10 Years – Treasury Note
10+ to 30 Years – Treasury Bond
Under normal circumstances, loans with longer terms have greater interest rates.
The following graph is the Yield Curve for U.S. Treasury securities as of December 30th of 2015 and November 23, 2016. Each line includes the annualized yield at that time for:
- 1 month Treasury bill
- 3 month Treasury bill
- 6 month Treasury bill
- 1 year Treasury bill
- 10 year Treasury note
- 20 year Treasury bond
- 30 year Treasury bond
Interest rates at all durations have risen since last year end as shown by difference in these two lines. Since the longer term (duration) loans have greater rates, and the yield is upward or positively sloped, this is known as a normal yield curve. There are times when the yield curve is negatively sloped. Under a negative yield curve, shorter term (duration) loans have interest rates greater than longer term loans. This happens when the market expects longer-term rates to decline and short term rates to increase. This is known as an inverted yield curve and is an indicator of an ongoing economic recession. There is no recession in sight as of now based on the yield curve. A flat yield curve is a predictor of a soon-to-be recession.
So where to from here for 30-year fixed-rate residential loans? The following table shows the latest forecasts for 2017 and 2018 from Fannie Mae, Freddie Mac and the MBA.
Am still sticking with my forecast from months ago. My current expectation is that by mid-year 2018, 30-year residential rates will be in the 4.7 to 5.3 percent range. While this increase will demolish the refinance market, these rates will not impact housing as long as job growth is 2.0 percent or greater. Rising rates will, however, result in a greater use of adjustable rate loans by buyers.
Ted
