28-Dec-21 – The sand has pretty much run out of the hourglass. To rein in inflation – which rose to 6.8 percent in November – the Federal Reserve has announced it plans to shift toward a tighter monetary policy from a relaxed policy that has supported the economic rebound from the 2020 pandemic recession.

Dr. Robert Dietz, chief economist for the National Association of Home Builders, forecasts that the federal funds target rate will likely undergo three 25-basis-point interest hikes in 2022, and three more similar increases in 2023.

This implied tightening would push the 10-year Treasury rate – the gauge economists use to forecast 30-year-fixed mortgage interest charges – to 2 percent from the current 1.42 percent. As a result, the interest rate on benchmark 30-year home loans will rise “somewhat higher than 3.6 percent by the end of next year,” said Dietz (left).

A recent forecast by the Mortgage Bankers Association projects 30-year fixed home loan rates to rise to 4 percent by the end of 2022. If the Fed hikes its rates three more times in 2023, mortgage rates easily could rise to 4.5 percent or higher.

On December 16, the benchmark 30-year fixed home loan average nationwide rose to 3.12 percent, up from 3.10 percent a week earlier, reported Freddie Mac’s Primary Mortgage Market Survey. A year ago, the 30-year fixed loans averaged 2.67 percent.

Meanwhile, the rate on 15-year fixed mortgages slipped slightly to an average of 2.34 percent from 2.38 percent a week earlier. A year ago, lenders were quoting a rate of 2.21 percent on 15-year fixed loans.

Thirty-year fixed mortgage interest rates ended 2020 at a rock bottom 2.66 percent, the lowest level in the Freddie Mac survey history, which began in 1971. Home loan rates set new record lows for an amazing 16 times in 2020, and tens of thousands of homeowners refinanced.

“Mortgage rates inched up...as a result of economic improvement and a shift in monetary policy guidance,” noted Sam Khater, Freddie Mac’s chief economist.

“While house price growth is slowing, prices remain high due to solid housing demand and low supply. We expect loan rates to continue to increase into 2022, which may leave some potential home buyers, with less room in their budgets, on the sideline,” said Khater (right).

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

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

• First Savings Bank of Hegewisch was quoting 2.684 percent on a 30-year loan and 2.1 percent on a 15-year loan with 20 percent down payment and a $570 loan fee.

• Gateway Capital Mortgage in Chicago was quoting 2.76 percent on 30-year loans and 2.125 percent on 15-year mortgages with a 3 percent down payment and a $595 loan fee.

• Rate Rabbit was quoting 2.79 percent on a 30-year loan and 2 percent on a 15-year mortgage with 20 percent down. However, the loan fee is $1,900.

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 percent on five-year balloon loans.

Nearly six decades ago, between 1963 and 1965, you could get a mortgage at 5.81 to 5.94 percent. Between 1971 and 1977, the now-defunct Illinois Usury Law held rates in the 7.6 to 9.0 percent range. In the early 1980s, runaway inflation caused home loan rates to skyrocket. According to Freddie Mac, benchmark 30-year mortgage rates peaked at a jaw-dropping 18.45 percent in October 1981 during that Great Recession. (Left) Gemini 1 lifts off at Cape Kennedy on April 8, 1964.

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