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The average 30-year fixed rate mortgage (FRM) rate for the week ending December 14, 2017 increased slightly to 3.84%. The 15-year FRM rate remained level at 3.15%. With the slow decline of the past year now reversing, rates will slowly rise going forward.
The financial markets going into 2017 saw a “Trump jump” due to post-election investor anticipation.
Those bounces lost steam with mortgage rates slowly declining as we head into the 2018 period of economic slowdown. The decade-old recovery has been kept from overheating by a combination of failed fiscal action and the Federal Reserve (the Fed) rate hikes.
FRM rates are tied to the bond market and move in tandem with the 10-year Treasury Note (T-Note) rate. Investors have been placing large sums in bonds and on deposit with the Fed for safekeeping. This is due to congressional uncertainty over fiscal rectitude and a scarcity of investment opportunities beyond the pricey stock market and shaky hedge funds. These excess funds have kept FRM rates low and steady.
Mortgage lenders use the 10-year T-Note to determine a homebuyer’s FRM rate — while adjustable rate mortgage (ARM) rates are based on interest rates paid on savings accounts. The difference between the FRM note rate and the 10-year T-Note rate represents the lender’s risk premium. The premium accounts for potential losses due to foreclosures which are not present when holding T-notes.
The current spread between the 10-year T-Note and 30-year FRM rate is now 1.47%, below the historical difference of 1.5%. However, the long-term trend shows a more elevated spread between the two rates, a condition most likely to continue as the rate of foreclosures is starting to rise. A higher spread indicates higher than normal mortgage rates for homebuyers and owners refinancing. As buyers are now faced with both overpriced mortgages and excessive home pricing, we are witnessing a logical reduction in purchase-assist originations and a slowdown in residential sales volume. The solution is a doubling up on SFR construction in city centers to create ownership turnover, which increases inventory and sales volume.
Further, as corporate taxes are reduced, stock values will temporarily rise. Once stock values drop again, investors will exit the stock market and invest in bonds, causing a decline in the 10-year T-Note rate and an artificial drop in mortgage rates.
As of November 2017, the average monthly rate on ARMs increased to 3.35%, far above its low point of 2.49% experienced in May 2013. The use of ARMs to fund the purchase of homes has gradually risen over the past year. The rise is due to home prices accelerating faster than the rate of pay, causing buyers to take on more risky ARMs to extend their purchasing power. With each Fed hike in the short-term interest rate they push up the ARM rate proportionately.
Looking forward, expect ARM rates to move in tandem with future adjustments to the short-term rate made by the Fed – as with the Fed’s recent .25% rate hike on December 13, 2017, which will push ARM rates up proportionately.
Further, some key federal changes proposed by the current administration – though yet to be implemented and highly unlikely to occur – may put upward pressure on ARM rates, along with payments on consumer debt for cars, credit cards and business loans. These pending proposals include:
- tax rate reductions and increased tax incentives to privatize government infrastructure programs, causing a net drop in federal tax revenue;
- deregulation of mortgage lending that will increase availability of predatory mortgages and homebuyer demand for mortgages;
- a congressional shift from fiscal austerity to stimulus through growth in infrastructure and military spending, triggering a sharp rise in the employment rate, labor force participation and wages;
- increased federal and private borrowing spent on new long-term government programs that will raise demand for capital from the bond market; and
- new import tariffs driving up the cost of goods and thus the rate of inflation, resulting in higher interest rates.
The only changes to have occurred so far are the new tariffs placed on lumber imports from Canada, increasing the cost of lumber by up to 20%. As Canadian lumber composes around 30% of all lumber used in U.S. residential construction, the tariffs are expected to raise construction costs and will likely drive up home prices at least 2% before exchange rates rebalance to quickly eliminate the increase in dollar costs and reduce the rate of exports from the U.S. to Canada.
Further, the elimination of mortgage regulations and restructuring of the Consumer Finance Protection Bureau (CFPB) will increase predatory lending and weaken the CFPB’s ability to enforce lender compliance with consumer protection regulations.
Updated 12/14/2017. Original copy released 03/13/2012.
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1. 30-year fixed rate mortgage (FRM) rate, weekly — Chart update 12/14/17
2. 30-year FRM rate, monthly — Chart update 11/30/17
3. 15-year FRM rate — Chart update 12/14/17
4. 5/1 adjustable rate mortgage (ARM) rate — Chart update 11/30/17
5. 10-year Treasury note rate — Chart update 12/14/17
6. Combined FRM and 10-year Treasury note rates — Chart update 12/08/17
7. 91-day Treasury bill rate — Chart update 12/08/17
8. 3-month Treasury bill — Chart update 12/08/17
9. 6-month Treasury bill — Chart update 12/08/17
10. Treasury Securities average yield — Chart update 12/08/17
11. 12-month Treasury average — Chart update 12/08/17
12. Cost of Funds Index — Chart update 08/25/17
13. London Inter-Bank Offered rate (LIBOR) — Chart update 08/25/17
14. Applicable federal rates — Chart update 12/08/17
15. Private lender section 32 Reg-Z loans — Chart update 12/08/17