For the mortgage industry, 2021 proved to be more unpredictable than expected. While most economists ended Q2 having forecast rates to be in the mid-3s by year-end, the emergence of the delta variant had other plans. Fears of a delayed economic recovery kept rates at or below 3% for the majority of the year. But how long will the honeymoon last?
According to Freddie Mac’s Primary Mortgage Market Survey, the average 30-year fixed rate was at 2.65% during the first week of 2021. As we entered Q4, that average hovered right around 3.09%, which, although nearly half a point higher than the yearly low, was still more attractive than the year-to-date high of 3.18% in early April. Freddie Mac has predicted rates to hover around 3.4% in the fourth quarter, while both Zonda and the Mortgage Bankers Association are calling for 3.2% by year-end.
Despite rates being near historic lows, there also have been challenges. The refinance boom of 2020 has fizzled, and overall mortgage applications have dropped. When asked about the biggest challenges and successes of 2021, Jason Will, senior vice president of market growth with Embrace Home Loans, says, “Our biggest challenge is also our success. We’ve successfully managed unprecedented volume while onboarding dozens of new sales team members and are implementing numerous strategies in order to fuel growth as we transition into a smaller, more competitive purchase market.” Companies must balance declining applications while maintaining a staff and programs that allow for innovative growth.
Although common consensus is rates will continue to climb the next 12 to 18 months, it isn’t set in stone. “The big worry on investors’ minds at the moment is inflation,” says Lindsay Poe, division president at BluPrint Home Loans. “When inflation goes up, so do rates, because investors purchasing mortgage-backed securities need to see bigger returns in order to profit. With regard to economic growth, it almost always leads to higher rates. In addition, if the markets think the Fed is going to start talking about reducing bond purchases as part of that economic recovery, we will see rates jump.”
Predicting rates is tricky as it’s difficult to read the proverbial mind of the market. That being said, the 10-year Treasury yield has traditionally been a good indicator of rate activity. To provide context around historical relationship, the 10-year yield has hovered between 2% and 2.4% when rates were at 4%. In contrast, when rates were at 3.5%, the 10-year yield fluctuated from 1.6% to 1.8%. The 10-year yield is at 1.5%, which seems to indicate higher rates are around the corner.
If rates increase as predicted, what impact will it have on the housing market? Most agree that in an already affordability-challenged environment, some impact to the housing market will be inevitable. In preparation, lenders are listening and already getting creative. In an effort to combat consumer concerns regarding affordability and encourage hesitant buyers to get in the market while rates are still low, some mortgage companies have raised their conforming loan limits in advance of the Federal Housing Finance Agency’s formal announcement of 2022 thresholds.
Creativity and stellar service will be important standards for mortgage companies to achieve in the coming year. Builders and their buyers will benefit by working with a lender who places high value on communication, especially as rates (aka monthly payments) are at risk for potential volatility. No matter what the rate, service never goes out of style.
