Mortgage Rates are Expected to Rise in 2022
The Federal Reserve chairman, Jerome Powell, announced last week that the Fed will be raising the effective funds interest rate (the rate banks charge other banks when they lend to one another) at least three times in 2022. Historically, these increases inevitably lead to higher mortgage rates.
Just last week, in anticipation of rising rates in 2022, average long term U.S. mortgage rates jumped to their highest level since March 2020. Freddie Mac (a government sponsored mortgage lender) reported last week that the benchmark 30-year home loan rose to 3.45% last week from the week before when the rate stood at 3.22%. When the pandemic started in March of 2020, the rate was 3.5%. As the Fed cut the effective fund rate after the pandemic began, mortgage rates dropped to 2.79% in January of 2021. The fifteen-year rate fell proportionately, as well, during the above time frames.
According to Sam Khater, Freddie Mac’s chief economist, “This was driven by the prospect of a faster than expected tightening of monetary policy [The Fed accomplishes this by raising rates which makes it more expensive to borrow, therefore discouraging borrowing] in response to continued inflation exacerbated by uncertainty in labor and supply chains.” Inflation (7% in December 2021 compared to a year earlier), is the highest in 40 years.
Beyond soaring inflation, economists predict strong economic growth and a tight labor market which will also serve to push rates even higher.
According to Time.com, “The majority of economists and housing market analysts we talked to believe mortgage rates will drift higher as the year progresses.” Beyond raising rates, the Fed has already eased its monthly buying of U.S. Treasuries and plans to continue the unwinding through 2022. When the Fed slows its buying of Treasuries, it serves to put upward pressure on interest rates. Time.com states that, “Although rates are likely to rise this year, borrowers still have time to lock in a low mortgage rate by any historical standard. Mortgage rates in the 3.5 to 4% range are still lower than almost any time in mortgage rate history.”
The highly respected Forbes magazine sees things even more ominously. When the Fed revealed that it will taper its treasury bond purchases and mortgage-backed securities in addition to its stated plans to raise rates a few times in 2022, the 10-year treasury interest rate rose from 1.52% on December 31st 2021, to 1.7% on January 13th 2022. “This moved helped bump 30-year mortgage rates from 3.11% to 3.45% over the same period [now they are a bit higher as stated above] … for homebuyers, they [mortgage rates] can dictate how much home you can afford.”
According to the latest CoreLogic home price index, home prices ballooned nationally by 18.1% year over year. Even though home prices soared, the very low mortgage rates tempted many buyers to enter the market. But if home prices continue to rise and mortgage rates climb, purchasing a home becomes far more difficult for millions of potential buyers.
I’m the first to say that experts are sometimes wrong. But if the consensus is correct this time, buyers who are considering a home purchase would be wise to decide before rates rise (perhaps far higher) and, therefore, monthly mortgage payments would increase considerably.