Freddie Mac Lowers Mortgage Rate Predictions

August 16, 2016

Freddie Mac economists expect that home buyers and home owners will be able to take advantage of low mortgage rates for longer than they originally predicted.

The United Kingdom’s decision to leave the European Union – dubbed the Brexit vote – sent U.S. mortgage rates plummeting and muted the outlook of a rapid global recovery. The shockwave is expected to have a long-lasting effect. The 30-year fixed-rate mortgage averaged 3.44 percent in July, the lowest monthly average since January 2013.

For the second consecutive month, Freddie economists have lowered their interest rate estimates for the rest of the year and 2017. In July, economists cut both their 2016 and 2017 estimates by 40 basis points; this month they cut projections for 2016 another 10 basis points and decreased their 2017 projection another 30 basis points.

What’s that translate for rates? Economists predict the 30-year fixed-rate mortgage for this year to average 3.6 percent. For 2017, they are predicting the 30-year fixed-rate mortgage to average 3.7 percent.

With continued job market growth, a slight improvement in wages, and low interest rates, economists are predicting a strong second half of this year for the housing market. Mortgage originations are expected to top $2 trillion this year, the highest volume since 2012. The Mortgage Bankers Association Weekly Mortgage Applications Survey says refinance applications are up over 50 percent from a year ago.

“At the current pace, we’re likely to see the mortgage market top $2 trillion in originations for the first time since 2012,” says Sean Becketti, Freddie Mac’s chief economist. “And unlike in 2012, when the market was driven largely by refinances, today’s market is more balanced between home refinances and purchases; nearly 50-50. This is good news for home sales as we’re likely to see the best year in home sales in a decade. This is a good sign for the housing market as it continues to be an even brighter spot in the economy. However, the housing market still has challenges, which is reflected in our housing starts forecast. Low levels of inventory across many markets will continue to put upward pressure on housing prices for the foreseeable future.”

According to Freddie Mac’s Economic and Housing Research Outlook, home prices rose an average of 6.2 percent in June. While the pace of appreciation is moderating somewhat, home price increases are still above income growth, which is up 2 to 3 percent for comparison. Increasing inventory challenges from a limited number of homes for sale could moderate price growth. Also, if interest rates did rise higher, home price increases also could drop quickly, economists note.

Source: “Freddie Sees Banner Year for Originations; Lowers Interest Rate Projection for 2017,” Mortgage News Daily (Aug. 15, 2016)