Will Mortgage Rates In 2017 Go Up, Down, Or Stay Flat?

Published: Jan. 11, 2017, 10:01 p.m.

b"With\\xa0Greg McBride, Senior Vice President & Chief Financial Analyst for Bankrate.com
Mortgage Rates in 2017: Are they Heading Up, Down, or Flat?
Greg McBride, Chief Financial Analyst at Bankrate.com, returns to On the Money today to talk about mortgage rates, the federal funds rate, housing markets, and the economy, in general, and where they all might be headed in 2017.\\xa0\\xa0 Naturally, Greg is an expert on these and other topics, and we're lucky to have him here to share his insights and expectations about the coming year.
Before turning towards a more forward-looking trends analysis (including Greg's forecast for mortgage rates in 2017), the conversation begins with a look at mortgage rates and the Federal Reserve's modest rate hike at the end of 2016.\\xa0 On December 14, 2016, the Fed raised the overnight \\u201cfederal funds rates\\u201d by 0.25%\\u2014only the second of such raises in almost a decade.\\xa0 This immediately caused a larger spike in rates (aka yields) on 10-year notes and 30-year bonds and this, in turn, elevated mortgage rates, which are tied to these longer-term government securities.\\xa0 Building on a rise that started in October, mortgage rates ended the year up 0.75%, an increase that has inflicted a certain amount of pain on potential home buyers.\\xa0 Granted, this is coming on the heels of summer mortgage rates that scraped record lows of 3.5%, so, in that context, the Q4 rise is not a major game changer.
Trump and the Prospect of Fiscal Stimulus and Rate Inflation
Greg notes how unusual and, indeed, how unprecedented it was that every week in Q4 2016 saw mortgage rates creep up (except for one week when rates were flat).\\xa0 Steve wonders whether this might be evidence of an \\u201cinflection point\\u201d, where a short-term trend becomes a long one.\\xa0 It's important to recall that mortgage rates were rising before the fed funds rate change, and Greg attributes this, in large part, to an expectation that Trump will follow through on his promises to cut taxes and invest in large-scale infrastructure spending.\\xa0 These stimulus programs, if and when they arrive, should accelerate economic growth (GDP), add heat to an already strong stock market, and add to inflationary pressures.\\xa0 This would also shift bond prices lower and yields higher on all securities including mortgage rates in 2017.
Despite these rumblings of higher rates fueled by economic expansion, Greg is optimistic about where mortgage rates are headed in both the short term and for the remainder of 2017.\\xa0 He points out that rates have pulled back slightly already in 2017 (from 4.3% to 4.2%) and expects that they will bounce around the 4-4.5% range for the foreseeable future.\\xa0 He also expects that any correction in stock markets, international financial crisis, or a broader downturn in GDP will drive mortgage rates lower.\\xa0 This is because, reacting to fear of falling asset prices in a so-called \\u201cflight to safety\\u201d, investors will rotate out of stocks and other equities and into bonds.\\xa0 Higher demand for and thus prices of bonds leads to lower yields and hence cheaper mortgages.\\xa0 This could present an opportunity for buyers to lock in rates under 4% and for homeowners to refinance at those rates as well.
Treasuries Rates and Deeper Economic Trends
Greg makes a case that the bulk of the rise in interest rates has already been priced in by the market.\\xa0 Looking deeper into the dynamics shaping the economy, he sees volatility emerging from conflicting trends: on the one hand, fiscal stimulus, and, on the other, weak productivity gains and an aging population.\\xa0 The uneven growth that would result from these conflicts is not a departure from the pattern over the last few years.\\xa0 As we've seen in the recent past, Greg expects mortgage rates to continue bouncing up and down.\\xa0 In fact, he takes a step beyond this mixed forecast and states that he think..."