Mortgage rates plumbed new depths in December, setting all-time lows south of 3 percent. Rates could fall even further in the early months of 2021 before beginning to climb.
That’s according to Greg McBride, CFA, Bankrate chief financial analyst. He expects rates to end 2021 at 3.1 percent — but he says there could be some dramatic swings throughout the year.
“It will be an especially volatile year for mortgage rates, with fixed rates falling to even lower lows early in 2021 on economic concerns but rebounding in the back half of the year as widespread vaccinations lead to a surprisingly strong surge of economic activity — and the inflation worries that come with it,” McBride says.
His rate forecast is in line with the general consensus among housing economists. The National Association of Realtors expects mortgage rates to average 3.1 percent in 2021, up from 3 percent in 2020. The Mortgage Bankers Association says rates will average 3.3 percent in 2021.
Fewer refis, more purchases
If the rate picture follows that path, the refinancing boom of 2020 will slow dramatically by the second half of 2021, says Michael Fratantoni, chief economist at the Mortgage Bankers Association.
“We think refi volume is going to fall off pretty sharply, particularly in the second half of 2021 as the economy really finds its footing,” Fratantoni says.
While mortgage rates will rise enough to discourage refinancing, they’ll remain low enough to make homebuying attractive, Fratantoni says. He predicts record mortgage volumes in 2021.
“Even if mortgage rates are going to be high enough to curtail refi, they’re still going to be low enough to keep housing affordable,” he adds.
How the Federal Reserve affects rates
The Federal Reserve doesn’t directly set mortgage rates, but the central bank does set the overall rate environment. The Fed slashed rates when the coronavirus recession began, and it has signaled that it will keep rates low for years, which will translate to little upward pressure on mortgage rates.
“I think the Fed is going to keep their foot on the gas, keeping short-term rates at essentially zero through 2022, and only very slowly begin to raise rates in 2023,” Fratantoni says.
While the federal funds rate doesn’t directly affect mortgage rates, there is a strong correlation between the rate on 10-year Treasury bonds and the 30-year mortgage. That spread widened in the spring and summer.
The typical gap between the 10-year government bond and the 30-year fixed-rate mortgage is 1.5 percentage points to 2 percentage points. During the scary early days of the COVID-19 pandemic, that spread rose as high as 2.7 percent. However, the gap has returned to normal.
Generally, an improving economy correlates to rising mortgage rates. Economists and investors think the U.S. economy will bounce back in 2021 as COVID-19 vaccines are distributed. However, it’s unlikely that mortgage rates will soar, McBride says.
“Any large increases will be snuffed out by the Fed’s buying of more long-term bonds and competition among lenders that brings mortgage-Treasury spreads closer to historical norms,” he says.