December 2021 saw mortgage rates continue to be pressured higher due to persistent inflation in the markets. The annual inflation rate increased over 6% in November 2021, which is three times the Federal Reserve’s desired target rate of 2% inflation.
Consumer Spending Stimulus Tapers Off
At the December 14-15 FOMC (Federal Open Market Committee) Meeting, the Federal Reserve announced it will double the tapering of its treasury bond and mortgage-backed securities purchase program from a reduction in purchases of $15 Billion per month up to a reduction of $30 Billion per month. At that rate, the program should end by March of 2022.
This program had been purchasing $120 Billion in treasury bonds and mortgage-backed securities from the markets per month, starting in June of 2020 through October 2021, to help support the economy through the pandemic. One of the primary functions of these purchases is to suppress consumer interest rates, such as mortgage rates, to keep stimulating consumer spending.
The Fed will likely wait a few months to see how removing this program will impact inflation before taking any further action to combat inflation. The primary means the Fed has to fight inflation is to increase the Fed Funds interest rate, which is the rate that institutional banks charge each other for overnight lending.
We could see the Fed start increasing the Fed Funds rate sometime around the middle of 2022, if inflation remains persistent and doesn’t start coming back down to the Fed’s desired target of 2%.
Mortgage Rates Will Rise
As the Fed Funds rate increases, all interest rates on revolving lines of credit, such as credit cards and Home Equity Lines of Credit (HELOCs) will be impacted immediately and will start rising. Fixed and adjustable mortgage rates tend to follow the Fed Funds rate eventually, but there is usually a short delay before we see these rates rise. Rising inflation, and the Fed’s primary means of fighting inflation through increasing the Fed Funds rate, will continue pushing mortgage rates up.
Home Purchase Prices Cooling
Rising mortgage rates will eliminate many home buyers on the fringes from being able to afford housing at the current lofty prices and we should start to see a cooling in home purchase prices. Fewer buyers in the markets means fewer multiple offers which should lead to some normalization in the housing markets after a torrid 2020 and 2021.
Market for Average and First Time Buyers
When interest rates are up and home prices are down, the payments are relatively similar. Any fixed rate below 5% is still amongst the lowest interest rate range in the country’s history. We have been spoiled by the lowest rates in the history of mankind that we have all experienced since February 2020, when the Fed cut the Fed Funds rate to 0%. Home purchases will continue to be brisk but maybe not with as steep a curve of price increases as in the 2020 and 2021. As home prices stabilize, we will see how many cash buyers are still in the markets to compete with home buyers who need a loan to complete their home purchases. Less speculative buyers in the market will be a good thing for average and first-time home buyers.
Be Prepared for Opportunities
The Covid-19 pandemic, with all its variants, continues to create volatility in the markets. Volatility means that mortgage rates, though rising overall, will likely hit some sweet spots with temporarily low-rate pockets becoming available in the next two years.
This means being prepared to strike when those moments arise or being prepared to purchase and then refinance when one of those pockets becomes available is the way to continue capturing these historically low mortgage rates.
Hang on for a Bumpy Ride!
There is a lot of chatter out there about a recession in 2023 or 2024. If we do hit another recession, be prepared for the Fed to step in again and suppress interest rates for another run at historically low mortgage rates.
I guess what I’m trying to say is what goes up, will eventually come back down again and in the case of mortgage rates, the opposite is true as well. Hang on for another bumpy ride!