17-Jun-18 – Home and condominium buyers who sit on the fence and wait another two years could have to pay a 6.5 to 7 percent mortgage interest rate by 2020.

Experts base that gloomy forecast on the Federal Reserve Board’s sweeping new plan to raise interest rates two more times in 2018, three times in 2019, and once in 2020, ultimately pushing its benchmark federal funds rate to a range of 3.25 to 3.5 percent.

On June 14, the Fed raised its federal funds rate 0.25 percent for the second time this year to a range of 1.75 to 2 percent. It was the seventh rate hike since 2015 and it followed an increase in March of this year.

“We are still in the middle innings of rising interest rates,” said Lawrence Yun (left), chief economist of National Association of Realtors. “Consumers should expect another three or four rounds of interest rate increases over the next 18 months.” As a result, Yun said “mortgage rates will consequently continue to nudge higher.”

Freddie Mac’s national Primary Mortgage Market Survey on June 14 reported that benchmark 30-year fixed mortgages averaged 4.62 percent, up from 4.54 percent a week earlier. A year ago at this time, the 30-year fixed loan average was 3.91 percent.

Chicago-area lenders were charging 4.376 to 4.486 percent last week on 30-year fixed loans, according to RateSeeker.com.

Overall, this rate hike will be better than past rate hikes

The 30-year fixed-rate mortgage average climbed eight basis points to 4.62 percent following the Fed’s 25 basis-point rate increase, according to Sam Khater, Freddie Mac’s chief economist.

“The good news is that the impact on consumer budgets will be smaller than past rate hike cycles,” said Khater (right). “That is because a much smaller segment of mortgage loans in today’s market are pegged to short-term rate movements. The adjustable rate mortgage share of outstanding loans is a lot smaller now – eight percent versus 31 percent – than during the Fed’s last round of tightening between 2004 and 2006.”

Freddie Mac reported on June 14 that rates on 15-year fixed mortgages averaged 4.07 percent, up from last week when it averaged 4.01 percent. A year ago at this time, 15-year fixed loans averaged 3.18 percent.

With the economy now nine years into an expansion, experts say the Fed’s move reflects the steadiness of growth, the job market’s strength, and inflation that is finally reaching the Fed’s two percent target level.

“Inflation continues to firm and borrowing costs are inching higher,” Khater observed. “Although wages are slowly growing, stronger gains would certainly go a long way in helping consumers offset these increases in prices and rates.”

However, some economists worry that the Fed’s aggressive tightening of monetary conditions could spark a sharp slowdown in growth next year. That could force the Fed into reversing course and cutting interest rates in 2020.

Recently, former Federal Reserve Chairman Ben Bernanke predicted the next recession could be less than two years away. According to Zillow’s Home Price Expectations Survey, nearly half of the 100 real estate experts and economists surveyed said they expected the next recession to begin sometime in 2020.

(Left) Dr. Ben Bernanke with President George W. Bush on June 21, 2005. White House photo by Paul Morse.

Historically, interest rate range has been huge

Mortgage rates hit a historical rock bottom on November 21, 2012, when the 30-year fixed mortgage rate average hit 3.31 percent, Freddie Mac reported. More than 18 years ago, in August 1999, when many of today’s Millennial borrowers were in grammar school, lenders were quoting 8.15 percent on a 30-year fixed mortgage.

However, to really appreciate today’s low interest rates, housing experts say home buyers need only look at what banks and mortgage lenders where charging more than three decades ago in the early 1980s.

According to Freddie Mac, benchmark 30-year mortgage rates peaked at a whopping 18.45 percent in October 1981 during the Great Recession of the 1980s. Rates fell below 10 percent in April 1986, then bounced in the 9-to-10 percent range during the balance of the 1980s.

Archives of the now-defunct Federal Housing Finance Board show long-term mortgage rates were relatively affordable five decades ago at 5.81 to 5.94 percent between 1963 and 1965.

In 1966 and 1967, borrowers paid an average of 6.3 to 6.4 percent. Rates dipped below 6.5 percent in January 1968, when the national average hit 6.41 percent. Between 1971 and 1977, the now-defunct Illinois Usury Law held rates in the 7.6 to 9 percent range.