Eave wishes all readers a very happy holiday season! As we wind up 2018, we thought it would be useful to reminisce on what happened with mortgage and market interest rates this year.
Here’s what we saw in 2018 and what we expect to see in 2019:
A LOOK BACK:
Broadly speaking, both market and mortgage interest rates rose over the course of 2018. Followers of this blog series know that the economy has done well this year. This economic boom drove the Federal Reserve to raise their benchmark federal funds rate four times this year.
But there were some other interesting economic phenomenons that occurred this year as well.
The Gap Between Short and Long Term Interest Rates Shrank:
This year, the gap between short and long term interest rates shrank. This is meaningful, especially for homebuyers who otherwise may have chosen an adjustable rate mortgage (ARM). One of the many reasons our home buyers chose an ARM is because they don’t intend to hold the property for the full life of the mortgage. This allows them to ensure a lower interest rate for the time they do intend to hold onto the property, because they’ll be selling it before the rate is set to change. But since the lifetime cost of a 30-year fixed mortgage is now roughly the same as that of an ARM, it means that borrowers can forgo an ARM altogether, which gives them more flexibility should their financial positioning or ownership goals change.
30-Year Fixed Mortgage Rates Dropped from Where They Were in September and October
The 30-year fixed mortgage rate has come down a good bit from the highs observed in September and October. This is likely because wall street is beginning to call into question the idea that the economy will continue growing. So while things are good now, they believe a recession may be on the horizon.
Our takeaway is that 2018 saw dramatic rate increases, with mixed economic signals toward the end of the year. With crossing signals for what’s to come, we expect to see rates hold relatively steady in the first half of 2019, as both Wall Street and the Fed look at cues.
How does this bode for mortgage interest rates in 2019? The verdict is still out, but it’s likely we’ll see them moderately rise, or hold relatively steady. There are a few reasons for this:
We’re Starting to See Signs of a Possible Recession
Typically, stock market movements are leading indicators of recessionary trends. Despite the relative health of many parts of the US economy and only a modest indication of an economic slowdown, expectations of a recession in 2019 – 2020 have grown quite a bit. We see this fear being played out in stock market corrections that have begun to hit this month. For example, the S&P 500 closed on December 19th at 2,506.96. This is down a whopping 10 percent from the the start of the month.
However, it’s important to pause and remember that it’s not the Federal Reserve’s job to take cues from the stock market or to set interest rate policy to assuage stock market fears. Instead, they look at the latest data, which means that it will likely be longer before they see signs of a broad based economic slowdown. Typically, signs of such a slowdown start showing up in the economic data about 2 to 3 quarters after the stock markets start reacting. If the Federal Reserve starts signaling a slowdown of growth earlier than that, we would be wise to tighten our financial seat belts and brace ourselves for a worse-than-expected recession.
Homes Will Likely Become More Affordable
A recession is far from bad news for those looking to buy a home. In fact, economic slowdowns can bring significant opportunity. Why? Well, for starters, it means that homes will become more affordable because there will be lower demand (fewer people buy homes during a recession) and greater supply (there are more homeowners looking to sell their homes and cash out on their equity during an economic slowdown). Those who are able to make an investment in a home during a down economy will reap the rewards of strong returns when it starts growing again.
THIS ROUNDUP IN A NUTSHELL:
We’re likely to see mortgage rates hold fairly steady, if not moderately increase, in 2019. If the newly anticipated recession comes to fruition a little further into 2019, we would expect to see mortgage rates drop. But this is unlikely to occur until closer to the end of 2019 or even early 2020.
There is plenty to be thankful for this holiday season and lots to look forward to in 2019. You can check out Eave’s real-time rates here. We think you’ll find that they speak for themselves.