Let’s suppose you are a 30-year-old Millennial man or woman who just got engaged or married, and the New Year beckons as the perfect time to make plans to feather the nest and buy that first home or condominium.
Assuming you and your significant other have good jobs, a FICA score of 720, a wad of down payment cash, and not too much credit-card or student-loan debt, do you know how lucky you are?
You might be able to actually buy a slice of the American Dream before it fades into oblivion.
You may have noticed a news blip on your iPhone the other day that announced the Federal
Reserve raised its benchmark short-term interest rate a quarter of 1 percent. It is the first Fed rate hike in nine years.
So what? Seven years after lowering this rate to near zero, members of the policymaking Fed edged it up 0.25 of a point.
However, financial analysts say the modest rate increase to the federal-funds rate will put upward pressure on interest rates for a wide assortment of consumer and business loans—from home equity loans and mortgages to auto loans and student borrowing obligations.
“It’s the first time since 2006 that the Fed raise short-term interest rates,” noted Sean Becketti, chief economist, Freddie Mac. “We take the Fed at its word that monetary tightening in 2016 will be gradual, and we expect only a modest increase in longer-term rates.”
Crystal-ball gazing Freddie Mac economists see mortgage rates floating higher but remaining at historically low levels in 2016. Home sales will remain strong, but refinance activity should cool somewhat, experts say. “However, we are likely to see some short-term volatility as market participants adjust,” said Becketti.
Freddie Mac’s Primary Mortgage Market Survey reported on December 17th that benchmark 30-year fixed mortgage rates moved slightly higher for the second week in a row to an average of 3.97 percent, up from 3.95 percent a week earlier. A year ago at this time, the 30-year fixed loan averaged 3.80 percent.
Meanwhile, 15-year fixed mortgages averaged 3.22 percent, up from 3.19 percent a week earlier. A year ago at this time, the 15-year fixed loans averaged 3.09 percent.
On December 18, 2006, Freddie Mac happily reported that benchmark 30-year fixed home-loan rates held steady at 6.12 percent after the Fed kept the federal-funds rate unchanged at 5.25 percent for the fourth consecutive policy making meeting. Earlier, in mid-July of 2006, the average benchmark 30-year rate was a lofty 6.74 percent.
Beginning in mid-2004, the Fed methodically raised short-term interest rates 17 times over a period of two years. The series of quarter-point interest-rate hikes were designed to make sure inflationary pressures remain under control.
With the Great Recession of the mid-2000s already beginning, the Fed halted its rate-tightening campaign nine years ago in June of 2006. But now it looks like the interest-rate roller coaster is about to take off again.
Experts say the world of mortgageland is unpredictable, sometimes foggy and always volatile. Few of today’s novice borrowers remember that 16 years ago in August of 1999, lenders were quoting 8.15 percent on a 30-year fixed mortgage.
To appreciate today’s rock-bottom rates, housing historians say home buyers need only to look at the following interest charges banks and mortgage lenders were quoting between 1963 and the 1985:
• 1963-1965: Archives of the now-defunct Federal Housing Finance Board show long-term mortgage rates were a very affordable 5.81 percent to 5.94 percent between 1963 and 1965.
• 1966-1968: In 1966 and 1967, borrowers paid an average of 6.3 percent to 6.4 percent. Rates last dipped below 6.5 percent in January of 1968, when the national average hit 6.41 percent.
• 1971-1977: Between 1971 and 1977, the now-defunct Illinois usury law held rates in the 7.6-percent to 9-percent range.
• 1981: Thirty-year fixed mortgage rates peaked at a whopping 18.45 percent in October of 1981 during the Great Recession of the 1980s, according to Freddie Mac.
• 1985-1986: Rates fell below 10 percent in April of 1986, and then bounced in the 9-percent to 11-percent range during the balance of the 1980s.
In 1985, the year that today’s 30-year-old Millennial would-be home buyer was born, this writer was happy to lock in an 11.75 percent rate on a 30-year mortgage when buying a $140,000 English Tudor-style home in the Sauganash neighborhood on the Northwest Side.
Through a series of refinances on that home, the rate eventually was lowered to 7 percent on a 15-year fixed loan in the mid-1990s.
• 2016: What is the outlook for mortgage rates in 2016 as we start a new interest-rate cycle? Lawrence Yun, economist for the National Association of Realtors (NAR), predicts 30-year fixed mortgages may go up to 4.5 percent or 5 percent next year.
On a typical $200,000 conventional mortgage, an interest-rate rise to 4.5 percent would mean a monthly payment of $1,013, compared with $954 at a 4 percent interest rate today.
Better tighten your seat belts, mortgage hunters. We may be in for a bumpy ride in 2016 and beyond, because mortgage rates could be headed back into the 6-percent range by 2017.
For more housing news, visit www.dondebat.biz. Don DeBat is co-author of “Escaping Condo Jail,” the ultimate survival guide for condominium living. Visit www.escapingcondojail.com.