U.S. mortgage rates hit an all-time low in 2020. While rates have since increased slightly, they're still much lower than historical standards. Why are mortgage rates so low and when will they go up?
Aapart from the prevailing mortgage rates, your credit score would also have an impact on what rates you finally get. People with a higher credit score end up getting lower rates. The rates are higher for people with low credit scores. Also, banks might even deny the mortgage application for people with low credit scores.
Why mortgage rates are so low:
To get to the heart of when mortgage rates will go up, let's first discuss why they're low in the first place. In March 2020, the U.S. Federal Reserve went on an unprecedented easing to shield the economy from the impact of the COVID-19 pandemic. Overnight, it bought down the rates to zero bound and started an aggressive bond-buying program.
The measures helped bring stability to the financial system but also led to a spike in asset prices, including homes. One of the side effects of the Fed’s easing has been higher inflation, even though other factors are also playing a part in rising prices.
CD rates have fallen, too.
Currently, there's too much liquidity in the financial system. Banks are flush with funds and are paying very low interest on deposits. One causality has been CD rates, which are near all-time lows. CD rates don’t even come close to the current inflation.
When will mortgage rates go up?
The days of low mortgage rates seem numbered and they should go up soon. The Fed is meeting later in September and tapering or cutting down on the $120 billion monthly bond purchases could be on the table. If not in this month’s meeting, the Fed is expected to start tapering later in 2021.
When the Fed begins tapering, it would signal to the markets that the Fed is looking to undo some of the emergency measures that it took in 2020. The Fed might also give serious thought to a rate hike in 2022.
Mortgage rates are sensitive to the Fed’s policies and if the U.S. central bank signals a return to normalcy, we could see the mortgage rates rise towards more normalized levels.
What should mortgage buyers be watching out for?
If you're a mortgage buyer, or someone looking for a mortgage, you should be looking at three indicators. The first is the inflation data that's released every month. U.S. inflation in July matched the highest level since August 2008. The data for August 2021 is expected on Sept. 14. A higher-than-expected reading could raise the odds of tapering in Fed’s meeting this month.
Apart from inflation, you should be watching the indicators that reflect economic growth. Several indicators including nonfarm payroll and retail sales have shown a slowdown in growth. Several economists have lowered the U.S. GDP forecast for 2021 over the last few months.
Finally, watch out for new daily coronavirus cases. If the cases rise too steeply, they could jeopardize the recovery in the U.S. economy and the Fed would find its hands tied in unwinding its accommodative monetary policy.
Looking at the current macro environment, and assuming that we don’t get a black swan kind of event, U.S. mortgage rates at the end of 2021 could be higher than what they are currently.