We have made previous mortgage predictions stating that 30-year FHA loan rates would likely hit 5% before the end of 2013. Recent developments have prompted us to revise that outlook.
Our previous forecast for FHA mortgage rates was based on the assumption that the Federal Reserve would have started tapering their stimulus program by now. The Fed’s Federal Open Market Committee (FOMC) met on the 17th and 18th of this month, after which they surprised most economists and analysts by keeping their foot on the stimulus pedal.
Many Fed watchers, myself included, expected them to announce they would begin scaling back their monthly purchase of Treasury and mortgage-backed securities (MBS), collectively known as QE3. But that did not happen. Instead, the FOMC said they would continue purchasing $85 billion dollars worth of bonds and securities each month, to inject liquidity into the market.
FHA Rates Fall 20 Basis Points in Our Latest Lender Survey
Partly as a result of the Fed’s announcement, FHA loan rates actually dropped last week. Here are the latest numbers and trends from our weekly survey of 35 FHA-approved mortgage lenders across the U.S.
- September 12: Average rate for a 30-year FHA loan was 4.55%
- September 19: Average rate fell six basis points (0.6%) to 4.49%
- September 26: Average drops another 20 basis points (0.20%) to land at 4.29%
The FOMC meets again on October 29 – 30. But it’s not clear whether investors will get a Halloween trick or treat. Fed officials are typically tight-lipped and vague about their plans, even though they know them in advance of the FOMC meetings. For now, it’s the same old refrain: “If the economy shows signs of sustained improvement, the Fed could begin scaling back its purchase…”
Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, echoed this statement recently. “I don’t see any reason why we couldn’t [begin tapering] in December,” he said, “or potentially in October depending on what the data looks like.”
But wait. We’re talking about FHA loan rates here. Let’s connect the dots. When the Fed finally does scale back its stimulus measures, we will likely see a rise in mortgage rates across the board — especially the longer term loans, such as the 30-year fixed-rate FHA and conventional mortgages. It will mark the beginning of the end for “artificial suppression” of interest rates, which we have seen since the Fed began its quantitative easing policy in late 2008.
It’s not a question of if, but when. And that brings me to my key point.
Even if the Federal Reserve begins tapering in October (and you can flip a coin on that one), it probably won’t happen right away. Additionally, they will likely start the taper by reducing their purchase of Treasury bonds, while maintaining the current level of MBS purchases. After all, the last thing Ben Bernanke wants is to send long-term interest rates skyrocketing at a time when the housing recovery is still fragile.
Given all of these factors, it’s time for a revised prediction for FHA loans. It is unlikely that the average rate for a 30-year government-insured mortgage will rise to 5% by the end of 2013, as predicted in our previous forecast. (See disclaimer below.)
Chart: 30-Year Mortgages Ease in Recent Weeks
When it comes to mortgage rate trends, a picture is worth a thousand words. Or a chart, in this case. Here is the latest chart from Freddie Mac showing one-year trends for all four primary loan categories. The blue line shows average rates for the benchmark 30-year fixed mortgage, dating back to September 2012. FHA loan rates closely mirror these trends, as proven by our own weekly survey.
Fed officials first began talking about a taper in early May of this year. You can see the effects of their comments in the mortgage chart above. Rates started surging upward in early May and didn’t level off until several weeks later. This created a sense of urgency among home buyers and even yielded a few milestones, like FHA rates hitting a two-year high.
But if you move to the far-right side of the mortgage chart, you’ll see a period of easing. Since August 22, 2013, the benchmark 30-year rate has fallen by 26 basis points, or 0.26%. Home buyers, you may now breathe a collective sigh of relief.
Disclaimer: This story contains predictions and forecasts for mortgage rates in general, and FHA loans in particular. This information has been provided for educational purposes only and does not constitute a guarantee of future conditions within the lending market. No one can predict the future of interest rates with complete accuracy (as we have just shown).