The second month of the year is cold and snowy for millions of Americans. Despite the wintry weather, many can find comfort in warm thoughts of continued low mortgage rates.
Rates ended January at an all-time low, according to Bankrate’s national survey of lenders. Mortgage experts expect rates to remain alluringly low as we head toward Valentine’s Day and beyond.
Tracking rates in February
Greg McBride, CFA, chief financial analyst for Bankrate, forecasts favorable rates for borrowers in the days and weeks ahead. He cites several reasons.
“After a spurt higher in the first half of January, bond yields and mortgage rates are poised to ease in the coming weeks as the reality of raging COVID cases and weak economic fundamentals sets in,” he says.
The benchmark 30-year fixed mortgage rate will likely tick up but shouldn’t cross the 3 percent threshold next month, predicts Nadia Evangelou, senior economist and director of forecasting for the National Association of Realtors.
“I expect the 30-year fixed rate to hover around 2.8 percent to 2.9 percent in February,” she says. “Households and businesses should get more relief sometime soon. The Biden administration’s new stimulus package aims to provide fresh stimulus checks, enhanced unemployment benefits, and funding to facilitate the vaccination of more Americans. In the meantime, the soon-to-be-expired eviction and foreclosure moratoriums will likely be extended for longer.”
Various X-factors could push rates higher later in the year, however.
“If investors expect stronger growth than the market currently reflects, interest rates could rise further,” cautions Doug Duncan, chief economist for mortgage giant Fannie Mae. “Also, another fiscal stimulus could potentially increase growth, and if investors view that there is a potential increase in inflation, they may increase their inflation premium. Either scenario could lead to higher rates.”
The Biden administration’s proposed first-time homebuyer tax credit of $15,000, if enacted, could drive rates upward, too, as it would translate to higher demand for homes, Evangelou adds.
Given all that uncertainty, this could be a seesaw year for mortgage rates.
“Rates will be volatile throughout 2021, moving lower on signs of economic weakness and higher on signs of vaccination progress in a return to normalcy,” McBride says. “Mortgage rates will hopscotch back and forth around the 3 percent threshold but end the year slightly above that mark at 3.1 percent.”
Evangelou mirrors that message.
“Mortgage rates should increase further later this year. However, I don’t expect a major surge. Remember that rates are just coming off a new record low, so they should continue to be historically low,” she says.
Evangelou anticipates rates averaging 3 percent over the first six months of 2021 and 3.2 percent by the end of the year.
Her rationale is based on plausible possibilities and assumptions. Consider that both employment and inflation are expected to increase later this year. And while the coronavirus vaccine is becoming available to more Americans and the stimulus package is likely forthcoming, the reopening of more businesses is expected to put upward pressure on prices.
“Although inflation doesn’t have a direct impact on mortgage rates, the 10-year Treasury yield, which is a key benchmark for mortgage rates, responds quickly to inflation movements. Nevertheless, as the data show, inflation remains subdued, and I don’t expect it to be a problem in 2021,” Evangelou says. “Therefore, mortgage rates may rise, but only slightly.”
Several leading real estate organizations generally conform to this view. For instance, in their most recent mortgage forecasts, Freddie Mac and Fannie Mae, respectively, expect the 30-year fixed mortgage rate to average 2.9 percent and 2.7 percent during 2021. The Mortgage Bankers Association, on the other hand, predicts an average rate of 3.4 percent this year.
But it’s always wise to put things in proper historical context.
“Mortgage rates have gradually moved lower for the better part of the last 35 years or so,” says McBride. “While that won’t continue forever, the weak economic backdrop across the globe, aging populations in developed markets, and a glut of savings in growing overseas markets have proven to be a significant downward force, with no signs of letting up.”
What you can do
The prevailing logic is clear: Rates aren’t likely to get much lower. So if you have the means and motivation to commit to a low rate today, why punt the football in the hopes that mortgage rates puncture the historic floor later in the game?
“While it’s very difficult to predict where rates will go, if you have the budget and find a home price that fits your budget, you should act today,” Duncan says. “If you are waiting because rates may fall further, now you are speculating on where rates are going. Ask yourself: Can you afford to be a speculator?”
If the Federal Reserve stays true to its word that it will attempt to keep interest rates near zero percent until 2023, you can probably count on sustained low mortgage rates over that time.
“Would-be home buyers and those seeking to refinance will likely have access to ultra-low rates for at least the next couple of years. They may not be as low as they are right now but very low compared to the historical average,” Evangelou says, noting that mortgage rates were as high as around 11 percent in the 1990s and in the 9 percent range in the early 2000s. “If you are ready now, go ahead and lock in.”