Jan 232018

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By G. Steven Bray

Mortgage rates are the highest they’ve been in about 9 months. That sounds alarming until you remember that we’re still only a percentage point away from the all-time low 30y rate. However, given that rates have been so low for so long, it’s rational to wonder if we’ve seen the end of historically low rates.

First, let’s look again at what seems to be driving the rate increase. The biggest source of inspiration is expectations – expectations for inflation and economic growth. Expectations influence the actions of bond investors. Those expectations started shifting last fall and became more positive with passage of tax reform. Markets expect US growth to accelerate this year, and given labor market conditions and recent corporate announcements of higher employee pay, it’s reasonable to conclude inflation may shift higher. As we know, inflation is the mortal enemy of low interest rates.

Rates also respond to supply and demand. As part of its quantitative easing program, the Federal Reserve has been the biggest buyer of mortgage bonds. Last fall, the Fed announced it would start tapering those purchases. It could take higher rates to entice other buyers to pick up the supply the Fed was buying.

All this makes it sound like higher rates are inevitable, and for the short term, that may be true. However, the Fed still is befuddled why inflation has been subdued for so long. A couple factors that have kept a lid on inflation, falling commodity prices and concerns about the global economy, could push rates lower again.

So, what to do if you need to lock your mortgage rate? Even when rates are in an uptrend, we often see temporary dips that are good locking opportunities, and we saw one today. Take advantage of a dip if you can, but pick your bail out point. If rates hit it, lock and cut your losses. I’m concerned that if rates start rising again this week, they won’t stop until they’re 1/4% to 3/8% higher.

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