After a momentary pause in May, mortgage interest rates are back on the rise. According to data released in mid-May 2018, the average mortgage interest rate for the 30-year fixed rate mortgage was 4.62%. A year ago, home mortgage rates were only 4%. The 30-year fixed mortgage rate has not been this high since 2011.
The 15-year fixed mortgage is now 4.08%; it was only 3.27% a year ago. The five-year adjustable rate mortgage is 3.82% and was only 3.13% a year ago.
Why Are Mortgage Rates on the Rise?
Mortgage industry insiders say a strong economy, low unemployment, higher oil prices and comments from Fed officials are contributing to higher rates. Markets are expecting there to be three interest rate hikes this year, but it is possible there could be a fourth Fed rate hike before 2019.
After a big sell off in the bond markets after strong economic data was released, the yield on the 10-year Treasury went above 3% for its highest rate in seven years. Because how long-term bonds move is the best indicator of what mortgage rates are going to do, home loan rates went up. As yields rise, so do interest rates.
According to Bankrate.com, more than 50% of experts think mortgage rates will continue to rise for the rest of May. Generally, the price paid for a better economic environment is higher inflation and higher interest rates. That is why mortgage rates are the highest they have been in seven years.
Many experts think rates will continue the slow rise higher this year, going into fall and the midterm elections. Generally, if the Republicans hold Congress, it is possible that rates will continue to rise as markets will expect stronger economic activity. If Democrats take at least the House, it is possible rates could fall.
Regardless of who takes Congress, there is little doubt that higher rates are leading to more skepticism among potential buyers. Mortgage applications fell again last week with the market composite index falling 2.7% from the week before. The home refinance application rate fell 4%.
Experts say the combination of higher mortgage interest rates and higher prices is making it harder for people to apply for mortgages. In many cases, volatility in interest rates is good for the housing market, because it pushes people to buy before they go higher. But as there have been frustrations with high demand and low inventory, there could continue to be a drop-in mortgage applications.
As rates get closer to 5%, the markets could start to see what is called rate lock. This is when people stay in their homes with low rate mortgages than trade into a bigger or better home with a higher rate. For example, if you refinanced in 2017, you may have been able to get a rate below 4% for a 30-year mortgage. Those rates are long gone. If you were to buy another home today, you could go from a 3.5% mortgage to 4.5% or higher. That adds hundreds of dollars per month to your mortgage payment.
Experts say a one percent increase in mortgage rates can cause a drop in home sales of 7%. At this time, price increases on homes have not shown much sign in dropping, but as rates get closer to 5%, it is possible that this will start to happen.
It will be interesting to see what happens to mortgage rates around the Congressional election. As noted earlier, we could see higher rates if the GOP holds Congress. But it would not be surprising to see volatility in late October and early November before the election. There is a lot of uncertainty at such a time, and markets do not like uncertainty. But once the election is over, rates will probably continue to move higher as the economy continues on a strong trajectory.