When gauging interest rates, look at the big picture

For the past two years, the mortgage industry has been salivating over historically low interest rates that have brought in an incredible amount of business while helping millions of Americans affordably purchase the home of their dreams or save money with a refinance to a much lower rate. As it usually happens, even a hint of mortgage rates rising causes people to overreact and have a grim outlook on what’s coming next. That’s why historical context is extremely important when looking at rates.

Right now the dreaded number is a 4% interest rate on average. It’s true we are climbing and heading in that direction, but what does that number mean in a historical context? In this report we always quote the Freddie Mac 30-year fixed-rate mortgage average. The latest average came in unchanged at 3.55%. That’s of course a far cry from the pandemic low of 2.65%, but, where does this rank over the last 70 years?

A 4% average interest rate was pretty much the norm throughout 2019 with rates creeping close to 5% in 2018. But if you want to find the last time we actually did see 5% on average for interest rates, you’d have to go all the way back to February 2011—more than a decade ago. That means for the last 11 years people have been successfully and regularly buying homes at below 5% interest. If you really want a rude awakening, ask your parents what it was like buying a home in the 1980s with interest rates in the 12%-15% range.  

Historically, we are still in an extremely low interest rate environment. You should also keep in mind that the average we talk about isn’t necessarily what you will be quoted depending on your credit score, type of loan and other factors. 

It’s not all rosy, however, especially when it comes to home prices. Rising interest rates do make it less affordable to buy a home. That’s why it’s even more important to talk to a loan officer about your options. If you are a first-time homebuyer, you can pay a much lower down payment (typically around 3.5%) using an FHA loan. There are also loans, like USDA and VA loans, where you don’t have to put any money down. There are certain conditions that come with using these loans so make sure you have all the details before you make a decision.

If you are a current homeowner, high home prices are a really good thing. The latest U.S. Home Equity and Underwater report from ATTOM states, The portion of mortgaged homes that were equity-rich in the fourth quarter of 2021 – nearly one of every two – was up from 39.5 percent in the third quarter of 2021 and from 30.2 percent in the fourth quarter of 2020.” 

Combining rising rates with much higher home valuations helps explain why the refinance index was 18% higher year-over-year for the last week of January, according to the Mortgage Bankers Association data. The report notes many people are looking to get a refinance done before rates move too high, but it’s also likely there are many homeowners performing cash-out refinances to pull some equity out of their homes to use for renovations or pay off bills. 

 

LABOR MARKET UPDATE

The monthly jobs report from the Labor Department showed surging jobs in January with non-farm payrolls adding 467,000 jobs despite the Omicron variant’s rapid spread. The unemployment rate did tick up this month to 4.0% from 3.9% in the last report. Economists surveyed by Dow Jones had predicted a much more muted report of just 150,000 jobs added and an unchanged unemployment rate. 

For the first time in over a year private payrolls reported a net loss. The ADP private payrolls report showed a net loss of 301,000 jobs in January with the leisure and hospitality sector losing 154,000 jobs. Dow Jones economists had predicted an increase of 200,000 jobs. ADP’s Chief Economist Nela Richardson said, “The labor market recovery took a step back at the start of 2022 due to the effect of the omicron variant and its significant, though likely temporary, impact to job growth.”

After the Labor Department’s release of the jobs report, the Dow dropped by 200 points while the 10-year Treasury note yield jumped to 1.84%. That is a very key factor for the housing industry as mortgage rates tend to follow the 10-year note yield—so when the yield rises, interest rates typically rise in tandem. As the economy continues to strengthen, despite the concerns over inflation, it is expected that mortgage interest rates will continue to rise with it.



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