Chart: Average Mortgage Rates Drop Again, Despite Fed’s Actions

Home buyers rejoice. Mortgage rates have sunk even further into 3% territory, despite the Federal Reserve’s policy shift (and interest rate hike) that took place at the end of last year. This upends the predictions made by some economists and housing analysts, who expected mortgage financing costs to rise at the start of 2016.

Mortgage Chart Says it All: Average Rates Drop Again

The mortgage rate chart below was published by Freddie Mac on January 21, 2016. It shows average rates for the three loan categories they monitor (30-year fixed, 15-year fixed, and 5/1 ARM loan), dating back to this time last year. The most recent averages are shown on the right.

mortgage rate chart for January 21
Freddie Mac’s mortgage rate chart for the week ending January 22

Yesterday, Freddie Mac announced that the average rate for a 30-year fixed mortgage (FRM) fell to 3.81%. That’s the lowest it has been since November 5 of last year. The average rate for a 15-year FRM fell to 3.10% this week, while the 5/1 ARM loan average moved below 3% to end the week at 2.91%.

The thirty-year mortgage rate average has dropped for the last three weeks in a row, which is the exact opposite of what most analysts were expecting. Many industry observers were forecasting a rise in mortgage rates, partly as a result of the Fed’s policy change. Maybe a gradual rise is still on the way — but it’s clearly not here yet. On the contrary, home buyers and refinancing homeowners are still enjoying mortgage rates below 4%.

At the end of 2015, Fed officials announced they would raise the federal funds rate for the first time in years. This is the rate that banks use when loaning money to each other in the form of overnight transfers, and it has an indirect influence on consumer interest costs.

It’s important to note that the Federal Reserve does not control mortgage rates directly. But they do control the short-term federal funds rate, mentioned previously. Mortgage borrowing costs frequently (but not always) rise when the federal funds rate goes up. That’s why so many economists and analysts were expecting average mortgage rates to increase at the start of this year. So it’s somewhat surprising to see lending rates drop for the last three weeks in a row.

This week’s decrease was more than ten basis points, at least in the 30-year FRM category. The average rate for a 30-year fixed mortgage dropped by 0.11% from last week to this week, according to Freddie Mac’s long-running industry survey. That’s a significant decline, especially at a time when experts were expecting to see upward pressure on home loan interest rates.

It’s further evidence that you can’t bank on predictions.

Regardless of recent trends, the economists at Freddie Mac are sticking to their long-term forecast that rates will rise over the coming months. In a recent statement, they predicted that “mortgage rates will increase gradually through 2016 in response to monetary tightening, averaging 4.4% for the year,” and perhaps reaching 4.7% by the end of 2016.

Meanwhile, Home Prices Continue to Rise…

While mortgage rates have dropped in recent weeks, home prices in most U.S. cities continue to climb. And this is causing affordability problems for many would-be home buyers, especially those in hot markets like Dallas, Denver and San Francisco.

In their latest monthly housing forecast, the economists at Freddie Mac stated the following:

“The imbalance between housing demand and supply continues to boost prices [in the U.S.]. We expect house price growth to moderate a bit to 4.4 percent in 2016, still well above the long-run sustainable rate of house price growth.”

The 4.4% projection is a national outlook. Home prices could rise more than that in some hot real estate markets, like Seattle and Dallas. Such housing markets are currently experiencing supply shortages that are lifting prices faster than the national average.

Notes and disclaimers: This story contains forward-looking statements (forecasts) from third-party individuals and organizations not associated with the Home Buying Institute. The publishers of this website make no claims or assertions about future interest rate trends. Third-party data are deemed reliable but not guaranteed. The mortgage rate chart shown above was provided by Freddie Mac.