Mortgage rates could soon begin to increase as the economy improves, and the Mortgage Bankers Association (MBA) forecasted in its economic outlook that the downward trend for interest rates has come to an end.
"We may be at a place where they [interest rates] aren’t trending downward anymore because things have changed," Mike Fratantoni, MBA chief economist and senior vice president, said Sunday at the MBA Annual conference in San Diego.
Mortgage rates will continue to increase, rising to 4% by the end of 2022 for a 30-year fixed-rate mortgage and above 4.5% APR in 2023, the MBA forecasted in its mortgage rate predictions. Currently, the latest data from Freddie Mac shows interest rates increased above the 3% mark to 3.05% in mid-October for 30-year mortgage rates and to 2.3% for the 15-year mortgage interest rate.
"That’s not a high rate but it’s certainly higher than it has been recently," Fratantoni said.
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Future of the Fed remains uncertain
Much of the MBA’s forecast was aligned with the latest predictions from the Federal Reserve, detailing when it projects to begin tapering its economic stimulus buying bonds and increasing interest rates. The MBA forecasted that the Fed will begin raising the federal funds rate once again in the third quarter of next year, versus its previous forecast that the Fed would give its first rate hike in the first quarter of 2023.
However, there are several factors that could still change this forecast, such as the future of the leadership at the Central Bank.
"But it’s not just current Fed leaders and where they plan to take economic policy, but there are a lot of questions surrounding current Fed leadership," Fratantoni said.
He explained that Federal Reserve Chairman Jerome Powell’s term will soon be over, and the Biden administration has yet to determine if it will reappoint Powell or select a new leader for the Fed. Several other positions for Fed voting members are also currently open, and the policies of new appointees could change the current course of interest rates.
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High inflation is not transitory
The inflation rate surged to its highest rate in 13 years, increasing to 5.4% annually in September, the latest report from the Bureau of Labor Statistics showed. The Federal Reserve has repeatedly stated that it believes today’s high interest rates are transitory as the economy recovers from COVID-19, but the MBA’s forecast differed from this view.
"We don’t see us getting back to the Fed’s 2% for another two years," Fratantoni said, explaining that it is because higher wages are forcing companies to increase their prices. However, he said the positive in this is that wages and incomes are also growing. "Inflation is not transitory."
High inflation could spur the Fed to make interest rate hikes sooner than it previously anticipated. Homeowners can potentially save hundreds of dollars on their monthly mortgage payments by refinancing while rates are low. Visit Credible to get prequalified in minutes and find out how much you could save.
Disruptions to economic forecast arise
The MBA gave its forecast for this year’s economic growth and the direction of interest rates. However, Fratantoni said there are several factors that could disrupt the current economic track. Here are a few of those factors:
- Full-Year 2022 budget
- Debt ceiling
- Infrastructure package
- Social sending package
- Taper, liftoff
- Fed leadership changes
- German election
These uncertainties could change the direction of the economy and create more disruptions. However, for now, the MBA predicted the economy will continue to improve at a rapid rate.
"This pandemic, awful as it’s been across many so many different dimensions, has not hit us that hard economically," Fratantoni said. "The employment market may be back to pre-pandemic conditions in seven quarters."
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