Home Buyers Find it More Affordable to Buy
Mortgage rates are at their lowest levels in ten months.
New home buyers are finding it’s easier to afford a home than it was just months ago. Buyers can buy about 5% more home than they could have in December 2015.
The average 30-year mortgage rate offered by lenders now sits at just 3.65% according to Freddie Mac.
Yet more fuel has been added to the low-rates rally.
Mortgage rates shot lower after Federal Reserve Chair Janet Yellen presented a semi-annual monetary report to Congress.
The Fed sees economic headwinds in 2016 which could lead to yet another banner year for mortgage rates, despite widespread expert predictions of higher rates this year.
Home buyers should watch for falling rates, but be ready to pull the trigger if rates increase without notice.
Fed Continues Support of Lower Rates
The Federal Reserve is mandated by Congress to promote maximum employment and maintain low inflation.
One tool they use to achieve these goals is the federal funds rate. If Fed rate is low, mortgage rates are probably low as well. The Fed does not directly control mortgage rates. Rather, it encourages a low rate environment by keeping the Fed rate low.
The Fed kept its benchmark rate near zero for seven years until a one-quarter percent hike in December 2015.
Rates jumped momentarily, only to fall again. Faltering markets in China and depressed oil prices in the U.S. once again made mortgage rates plummet.
In response, the Fed reversed its previous plan to hike the Fed funds rates four times in 2016.
Yellen said the federal funds rate is likely to remain lower than it has been historically, and lower than it will be long term.
In other words, 2016 could be another prediction-busting year for mortgage rates.
Low Inflation is Good for Mortgage Rates
When inflation is in check, mortgage rates tend to stay low.
Investors are quite inflation-conscious. They invest in mortgage bonds and count on about a three percent return per year. If inflation shoots to five percent per year, they lose money. Mortgage rates then must rise to attract new investors.
This is why the inflation chatter is important if you’re a mortgage rate shopper.
Fortunately for new home buyers, inflation is still in check despite the Fed pumping $4 trillion into the economy since 2008. Inflation is still below the Fed benchmark of two percent.
Although we haven’t seen significant inflation yet, the Fed is concerned we will eventually.
That means the possibility is still on the table that the Fed will manage the situation with more increases, perhaps in 2016, maybe later.
Whenever it happens, it could drive mortgage rates up. However, with most of the world economy struggling, international investors continue to seek safe harbor investments like US Treasuries and Mortgage backed Securities (MBS).
When investors buy MBS, mortgage rates drop. We’re seeing that now with recent dip in rates sparking another mini-refi boom.
How Long will Low Rates Persist?
Are rates this low sustainable? Pundits have been saying for nearly two years that they are not. History agrees.
Europe will rebound, China will reach their objectives with their currency manipulation game and the effect of pumping $4 trillion dollars into the economy will cause inflationary pressure.
The risk of rising rates is best avoided especially with rates again near historic lows and home values on a meteoric rise.
With higher rates and home prices, what you can purchase in February might not be in your price range come August.
Today’s Mortgage Rates
Affordability is at recent highs as mortgage rates drop. Home prices are still affordable, and rising rents make it as cheap to buy a home as it is to rent in many areas of the country.
Rates change daily though, and a small increase can reduce your qualified home purchase price by thousands. Obtain a preapproval letter and lock in current rates.