As we look forward to the new year and where interest rates may be headed, it’s important to remember that each of the last few years were billed as the year rates were finally going to soar higher.
In reality, the yield on the 10-year Treasury note ended at 2.17%, 2.27% and 2.44% in 2014, 2015 and 2016, respectively. This year looks set to finish in similar fashion, with the 10-year currently yielding 2.46%, up just two basis points from the previous year. That’s a far cry from the forecasts we saw at the beginning of 2017, right after the GOP won the White House and ushered in a promised era of lower regulations, lower taxes and economic growth that would push 30-year mortgage rates north of 5%.
We did see some volatility in rates this year—the 10-year note traded all the way up to 2.63% immediately after President Trump’s win before eventually falling all the way to down to 2.01% to see if a 1ish rate felt better. It didn’t, but that’s not to say the 10-year won’t test 2.0% again in 2018.
The Fed has been very transparent in its goal to raise interest rates, and we currently have three more expected in 2018. That’s not due to the US economy overheating or inflation running rampant, but rather because the Fed needs to pack away some much-needed ammunition in the event the economy slips into a recession and needs a shot in the arm. It’s hard to cut rates if they’re stuck at zero!
What the Fed’s tightening cycle has given us is an increasingly flatter yield curve, meaning the spread between longer term rates—think investments and short-term rates, where banks borrow money—has decreased, cutting in to interest income for banks. With three more hikes looming, 2018 could possibly be the year we see an inversion of the yield curve. This is what concerns me. Tax reform is a done deal and the bond markets seemed to have moved on from trading on that story.
Another reason to believe mortgage rates will remain steady comes from the fact that the US Treasury Department has shifted to issuing debt in the form of shorter dated maturities. This leaves an insatiable demand for the 30-year assets—mortgages! That’s not to say ARM mortgages, whose rates are more tied to 2-year and 3-year bonds, aren’t in for some pain,. But it’s been a fixed-rate market for mortgages since the trillion and half billion of subprime ARMs blew up 10 years ago.
The one item that could push rates out of this recent range would be a massive, unplanned spike in inflation and/or inflation expectations, particularly in relation to wages. With core inflation crushing along at a low rate of just .10% to .14% per month, I have a hard time envisioning this happening. Further, wage growth has been stuck at just .1%, hardly inspiring anyone to go out and increase spending.
I expect rates to look very similar to 2017, with perhaps a little less volatility given that President Trump is entering his second year in office. I think we’ll see 10-years in the 2.25% to 2.75% range, without much risk of moving substantially higher. That means high 3% to low 4% 30-year mortgage rates for conforming borrowers with good credit and 80% LTV.
With the Fed sticking to its plan of multiple interest rate increases in 2018, potential homebuyers may want to act sooner than later to secure a low rate. But even if you aren’t quite ready to make a move, the window of affordable home financing looks set to remain open over the next 12 months. Though, as anyone watching interest rates for a living will tell you, we’re all just a presidential tweet away from shaking up the markets.
Jeremy Collett is Guaranteed Rate’s Executive Director of Capital Markets. Market Updates are designed to provide readers with a high-level yet insightful view of how economic news, events and trends affect mortgage rates and the homebuying process.