Mortgage rates finally reverse a year of stagnation

The Federal Reserve has announced plans to raise its key interest rates from now through at least the next year, and just as expected, the cost of mortgages will move higher in tandem.

The Federal Reserve has announced plans to raise its key interest rates from now through at least the next year, and just as expected, the cost of mortgages will move higher in tandem.

 

By many accounts, 2016 was a good year to be a homeowner or become one. Average home prices throughout the U.S. rose at a fast clip, especially when compared to the economy in general, welcome news for those looking to sell or build. At the same time, interest rates for mortgages started near historic lows and only went lower as the year went on. This had the effect of enticing more buyers into the real estate market as well as stimulating refinance activity. 

Of course, all these good things were bound to come to an end eventually. The Federal Reserve has announced plans to raise its key interest rate from now through at least the next year, and just as expected, the cost of mortgages will move higher in tandem.

Fed raising rates

In the latest meeting of the Fed's Open Market Committee, the notes of which were released Dec. 14, the nation's central bank leaders voted unanimously to raise the key funds rate 25 basis points to 0.75 percent. The FOMC also noted that it hoped to continue incrementally raising that rate throughout the next year, and at a faster clip than previously expected. By the end of 2017, most members of the committee hoped to see the rate around 1.5 percent, then continually increasing to as high as 3 percent by 2019. 

Since the cost of consumer borrowing is tied to the federal funds rate to a large degree, it was no surprise that average mortgage rates began climbing in the lead up to the announcement and then jumped immediately after. The Freddie Mac Primary Mortgage Market Survey, released Dec. 15, quoted an average rate of 4.16 percent for a 30-year fixed mortgage. This was up from around 3.5 percent just a month prior, and is one of the first weeks in 2016 to post a year-over-year increase.

Interest ratesWith the Fed's decision to raise interest rates, mortgages should move in lockstep.

Mortgage rates were close to 4 percent at the outset of 2016 and looked poised to move higher - this slight peak also came on the heels of the last FOMC rate hike. But by February, it was clear this small increase was more like a head fake. A wave of economic uncertainty on the domestic as well as the international front caused Fed chair Janet Yellen to reconsider her previous plans for multiple rate increases in 2016. Uneasiness only grew as an especially vicious U.S. presidential campaign drew to a close. 

Looking ahead

Oddly enough, the generally unexpected result of that election may have been the last push needed to spur the Fed into raising rates. Donald Trump's upset of Hilary Clinton initially provoked a small market panic, but Wall Street seemed to quickly change its mind. A sudden rally in U.S. stocks pushed the S&P 500 index to a record high by early December, with the Dow Jones Industrial Average poised to break its own milestone, according to MarketWatch. The value of the dollar, relative to other major currencies, also rose to within its highest point in 14 years.

All of this is to say that the U.S. economy, including the housing industry, should be ending a fairly tumultuous year on a high note. But if the Fed's latest report is any indication, there is no more cause for celebration now than there was just a year earlier. Higher interest rates will put a damper on borrowing, while inflation is expected to rise after a long dormant period. If the economy at large continues to grow at a good clip, many more Americans should get serious about purchasing a home. Still, there's plenty reason to remain cautious and prudent.