20-Dec-18 – It’s time to crystal ball gaze into the future for an outlook on where home loan interest rates are headed in 2019.

Analysts say the Federal Reserve Board has signaled its plans to gradually raise its Fed funds interest rate in the coming months to 3 percent or slightly higher. The funds rate, which the Fed charges banks for loans, was raised 0.25 percent on Wednesday and now has a target range of 2.25 to 2.50 percent, with another rate hike expected early next year.

However, Federal Reserve officials recently signaled a more data-dependent approach to monetary policy in 2019.

“We anticipate the Fed will pause to examine inflationary pressures and the state of the macroeconomy, before acting one more time later in 2019 to raise the federal funds rate,” predicted Dr. Robert Dietz (left), chief economist for National Association of Home Builders.

“This is a more dovish path than many others had forecasted earlier this year, when the expectation was for three or four rate increases from the Fed in 2019 alone,” said Dietz.

This slight change in tone from the Fed, according to the NHAB economist, combined with soft business sentiment data and rising concerns regarding the risk of a recession, have led to a decline of the 10-year Treasury rate, which fell from 3.23 percent in early November to less than 2.9 percent this week. Dietz predicts this will bring down mortgage interest rates and present more opportunities to prospective home buyers.

“While it is clear that some economic momentum has been lost, as reflected in recent stock market declines, household formations remain healthy and the unemployment rate of 3.7 percent is near a 50-year low,” Dietz said.

On the supply side of the residential construction industry, builders and remodelers continue to add workers, according to Dietz. In November, 7,900 jobs were added to the construction industry, while almost 128,000 have been added over the last year. As of October, there were 292,000 unfilled jobs in the construction sector – the second highest tally for this growth cycle. And the stock of residential construction loans for builders has expanded eight percent during the past 12 months.

Stock market decline could slow interest rate hikes

The recent stock market decline could be nothing more than a simple correction, observed Lawrence Yun, chief economist for National Association of Realtors. Yun believes a housing bubble prediction is misplaced, and the stock market correction could prove beneficial to home buyers by sparking a slowdown in interest rate hikes.

The benchmark 30-year, fixed-rate mortgage average declined to 4.63 percent the week ending December 13 – the lowest point in three months – down from 4.75 percent a week earlier. A year ago at this time, 30-year fixed loans averaged 3.93 percent.

On December 16, Chicago-area lenders were charging a range of 4.57 to 4.737 percent on 30-year fixed-rate mortgages, reported RateSeeker.

“Mortgage rates have either fallen or remained flat for five consecutive weeks and purchase applicants are responding with an uptick in demand, given these lower rates,” said Sam Khater (right), Freddie Mac’s chief economist.

“Home loan interest rates declined amid a steep sell-off in U.S. stocks. This rate reaction to the volatile stock market is a welcome relief to prospective home buyers, who have experienced rising rates and rising home prices in 2018,” said Khater.

But according to Yun of the NAR, mortgage rates are starting to settle.

“Mortgage rate increases from the summer months, all the way to November, have held back home buying but with the continuing stock market volatility, mortgage rates are now retreating. I think this is good news for the buyers, giving them a second chance.”

Most home buyers today are less concerned with stock market volatility and are instead “looking at income payment ratios and being able to afford a mortgage,” Yun said.

Danielle Hale, chief economist for Realtor.com, says many more Americans see their net worth more impacted by changes in the value of housing than by changes in the value of the stock market.

Homeowner confidence is looking good, according to Hale, who noted that the national homeownership rate has steadily climbed from an all-time low of 62.9 percent in the second quarter of 2016 to a rate of 64.4 percent in the third quarter of 2018.

By comparison, only about half of American families – 51.9 percent in 2016 and 53.2 percent at the highest level recorded in 2007 – have stock holdings, stocks owned either directly or indirectly such as mutual funds.