Fed Rate Hike And War Could Push Home-Loan Rates To 5%

If you are buying or refinancing a home and received a mortgage-rate quote prior to March 14th you are looking at a “relic-interest rate” from a bygone era.


The average benchmark 30-year fixed-rate home loan has catapulted from the mid-3% range into the stratosphere with some Chicago lenders charging anywhere from 4.375% to 4.625% as of March 17th.

Freddie Mac’s Primary Mortgage Market Survey reported on March 17th that the benchmark 30-year fixed home-loan national average hit 4.16%, up from 3.85% a week earlier. A year ago, the popular 30-year fixed mortgage averaged 3.09%.


“The rate difference is night and day since November,” noted Jeremy Rose, a mortgage broker with Guaranteed Rate in Chicago. “The cost of money is on the rise. It’s shock theater.”


“The 30-year fixed-rate mortgage exceeded 4% for the first time since May of 2019,” said Sam Khater, Freddie Mac’s chief economist. “The Federal Reserve raising short-term rates and signaling further increases means mortgage rates should continue to rise in 2022.”


While home purchase demand has moderated, Khater said “it remains competitive due to low existing inventory, suggesting high house-price pressures will continue during the spring home-buying season.”


On March 17th, Freddie Mac reported that 15-year fixed mortgages averaged 3.39% up from 3.09% a week earlier. A year ago, 15-year fixed loans averaged 2.40%.


As the mortgage-rate roller coaster speeds uphill toward 5% after the Federal Reserve Board’s .25% rate hike on March 16th, the dual-vice grips of rampant 8% inflation and worries about the Ukrainian War are putting a squeeze on consumer wallets.

As a result, the record-low home-loan deals in the upper 2%-range that kept the housing market pumping over the past two years are now a faded dream.


The Fed short-term interest rate hike is the first increase since 2018. Economist say projections released by the policy-setting Federal Open Markets Committee signal the likelihood of the Fed raising rates seven more times this year, which would push rates 1.75% higher at the end of this year.


On March 17th, the 10-year Treasury rate—the gauge economists use to forecast 30-year-fixed mortgage interest charges—rose to 2.19% from 2.15%.


This means that benchmark 5%-plus mortgage rates likely are on the near horizon, especially for borrowers who have a FICO score under 740. If you have a mediocre 650-point credit score expect to pay a sky-high 5.25% to 5.5% today for a 30-year fixed mortgage, lenders said.

The Freddie Mac survey is focused on conventional, conforming, fully amortizing home-purchase loans for borrowers who place a 20% down payment and have excellent credit.


While mortgage rates floated near—or below—the 3% bargain range for most of 2021, thousands of Chicago-area homeowners refinanced their loans. Those who sat on the dock not only missed the boat, but the boat now has sunk into deep Titanic-like waters.


The Fed faces an economic balancing act—the worst since the early 1990s. If the Fed shifts too quickly, the central bank could roil markets and tip the economy into a deep recession, experts say.


The big worry is the Russian invasion of the Ukraine has sent the cost of fuel, food and metals skyrocketing even higher. This raises economist fears of a 1970-style “stagflation” which would create threats to prices, grown and financial-market stability.


Earlier, economists forecasted that the federal-funds target rate will likely undergo three 25-basis-point interest hikes in 2022, and three more similar increases in 2023.


Now it looks as if the 5%-level could be broken in early May at the next meeting of the Fed’s Open Market Committee. If the Fed hikes its rates six or seven more times in 2022, mortgage rates could easily rise to 5.5% or 6% by the end of the year.


Thirty-year fixed-mortgage interest rates ended 2020 at a rock-bottom 2.65%—the lowest level in the Freddie Mac survey history, which began in 1971. Home-loan rates set new record lows an amazing 16 times in 2020, and tens of thousands of homeowners refinanced.


However, Chicago-area borrowers who move quickly still have a faint chance to lock in the following bargain rates as of March 17th, reports RateSeeker.com.

  • First Savings Bank of Hegewisch was quoting 3.490% on 30-year loans and 2.85% on 15-year mortgages with 20% down payment and a $615 loan fee.

  • Liberty Bank was quoting 3.564% on a 30-year loan and 2.75% on a 15-year mortgage with 20% down and a loan fee of $646.

  • Gateway Capital Mortgage in Chicago was quoting 3.8% on 30-year loans and 2.875% on 15-year mortgages with a 3% down payment and a $595 loan fee.

Mortgage-rate history


Archives of the now-defunct Federal Housing Finance Board show long-term mortgage rates in the 1960s were not much higher than the Great Depression, when lenders were charging 5% on five-year balloon loans.


Nearly six decades ago, between 1963 and 1965 you could get a mortgage at 5.81% to 5.94%. Between 1971 and 1977, the now-defunct Illinois Usury Law held rates in the 7.6%-to-9% range.


In the early 1980s, run-away inflation caused home-loan rates to skyrocket over the moon. According to Freddie Mac, benchmark 30-year mortgage rates peaked at a jaw-dropping 18.45% in October of 1981 during that Great Recession.


Rates finally fell below 10% in April of 1986, and then bounced in the 9%-to-10% range during the balance of the 1980s. More than 22 years ago—in August of 1999—when some of today’s Millennial borrowers were in diapers, lenders were quoting 8.15%.


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.

“The book is Escaping Condo Jail by Sara Benson and Don DeBat. I would say that anybody thinking about buying a condo, or even anybody serving on a condo board, or anybody who has any connection to a condo, this is must reading—all 600 and something pages. Thanks a lot for a great book!”

 

Steve Sanders, “Your Money Matters” WGN TV, December 22, 2014

By Don DeBat

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