U.S. Long-Term Mortgage Rates Post First Drop Since the Election: Freddie Mac

jackson hole symposium sparks fresh debate about us monetary policy

The surge in 30-year mortgage rates finally came to an end last week, although rates remain near 2 ½ year highs in the wake of Donald Trump’s election victory.

After two months of gains, U.S. 30-year mortgage rates finally fell in the first week of the year, mortgage provider Freddie Mac reported last Thursday.

The commitment rate on a 30-year fixed-rate mortgage declined 12 basis points to an average of 4.20% in the week ended January 5. Prior to last week’s drop, 30-year rates had risen 85 basis points between October 27 and December 29 – a streak of nine consecutive weeks.

The rate on a 15-year mortgage averaged 3.44% on January 5, down from 3.55% the previous week.

The five-year Treasury indexed hybrid adjustable-rate mortgage, which is more sensitive to monetary policy, ticked up 3 basis points to 3.33%.

Donald Trump’s surprise election win had raised bets on higher federal borrowing costs and a surge in inflation as result of corporate tax cuts and fiscal stimulus. Mortgage rates continued higher in the latter half of December after the Federal Reserve raised interest rates and signaled policy tightening could occur faster than previously expected in coming years.

Benchmark 10-year Treasury yields, which mortgage rates loosely follow, rose to 2.64% on December 14, the highest in more than two years. They have since eased back to 2.41%. Yields go down when investors bid up bond prices.

Last week, the minutes of the December 13-14 Fed meetings showed that rate-setters are uncertain about the pace and timing of future rate rises, but that Trump’s proposed policies could push up growth and inflation. [1] The President-elect’s inauguration is set for January 20.

Rising borrowing costs have taken a bite out of contract activity, according to the National Association of Realtors (NAR). The pending home sales index, a forward-looking indicator based on contract signings, fell to a ten-month low in November.

“The brisk upswing in mortgage rates and not enough inventory dispirited some would-be buyers,” the NAR said in a December 28 statement.[2]

The Mortgage Bankers Association reported on Wednesday that its index on refinancing applications rose 1.7% in the week ended December 30 but was down 44% since the November 8 presidential election.[3]

For many, 2017 will see higher mortgage rates, but that won’t necessarily reduce home sales due to a lack of existing inventory. Lower inventory levels have created an environment of multiple competing bids and incrementally higher prices. However, higher rates will certainly squeeze certain segments, such as first-time buyers, out of the market.  

Many expect long-term rates to hover between 4% and 5% over the next 12 months. Certainty beyond that is difficult to predict. During the last housing boom, long-term rates rose above 6%.[4]

A deluge of market data this month will provide investors more information about home sales during the month of December. Home sales remained robust in November, with the sale of both existing and new homes rising.

[1] Marion Dakers (January 4, 2017). “US Fed says Donald Trump could push up growth and inflation.” The Telegraph UK.

[2] National Association of Realtors (December 28, 2016). Pending Home Sales Backpedal in November.

[3] Reuters (January 5, 2017). “U.S. 30-year mortgage rates post 1st fall since U.S. election: Freddie.”

[4] Alex Veiga (January 8, 2017). “For 2017, many in U.S. see higher mortgage rates, home sales, prices.” Info News.

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Sam Bourgi

Sam Bourgi

Sam Bourgi has more than seven years of progressive experience in economic analysis, market research, public policy and the financial markets. He has a broad expertise in the financial markets, including commodities, real estate the foreign exchange. As a published author in both peer reviewed and industry research, Sam has covered topics ranging from mortgage-backed securities to consumer spending and labor. Sam's resume includes more than 40 government and industry publications, thousands of financial articles and hours of educational resources on personal finance and trading.

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