Mortgage rates entered June on a streak of three consecutive weekly increases. While rates are still fairly low, the upward trend could be a sign of what’s in store for the remainder of 2016.
30-year rates have been below 4 percent all year so far, but consumers should not get complacent about low rates. Anyone planning to buy, sell, or refinance a home or borrow against home equity would be wise to act now before rates move against them.
Upward Pressure on Rates
As of the first week of June, 30-year mortgage rates were at 3.66 percent, not far above the low point for the year that was reached in May. However, the cause for concern is not so much the rise in rates so far as the forces behind that rise. Specifically, growing inflation pressure could lead to more interest rate increases.
On the surface, inflation does not appear to be much of a problem, with just a 1.1 percent rise in the Consumer Price Index (CPI) over the past 12 months. However, that mild rate of inflation was thanks in large part to an 8.9 percent decline in the energy sector. Not only is this decline unlikely to be repeated over the next 12 months, but with oil prices up more than 40 percent since the end of February, it looks as though the trend in energy prices has reversed. Substitute rising energy prices for falling ones, and you are likely to see a higher overall rate of inflation.
Mortgage companies making loans over 30-year time frames are very sensitive to the risk of having higher inflation erode the value of the interest rates they charge. The natural defense against this risk is to raise interest rates if there is any hint that inflation may be gathering momentum. Already, April’s increase in the CPI was the largest in over three years. A few more months like that, and lenders will be hard-pressed to keep interest rates at current levels.
As always, much of the speculation about interest rates will center around the Federal Reserve, but financial institutions often don’t wait for the Fed to act before they make their own decisions on rates. Rather than watching the Fed, lenders are going to be watching the same things the Fed is watching, and right now that means keeping a wary eye on rising inflation.
Impact on Consumers
A potential rise in mortgage rates would have wide-ranging effects, impacting home buyers, owners, and sellers in the following ways:
- Would–be buyers would face the prospect of paying higher rates and therefore less of their housing budgets could go into the price of a home.
- Current homeowners could see rising rates take away favorable refinancing opportunities, and they would also make it more expensive to borrow against home equity.
- Home sellers could be facing a market where higher rates would dampen demand, keeping a lid on home prices.
Buyers, sellers, and homeowners may have different goals with respect to the housing market, but they all have one thing in common: each could be adversely affected by a rise in mortgage rates. This means that recent signs of higher rates should give each of these groups a sense of urgency to take action before the rate environment becomes less favorable.