Surprise: Forecast Predicts Mortgage Rates Could Be Lower in 2020

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Highlights from this report:

  • A recent mortgage industry forecast predicted that rates could be lower in 2020.
  • That contradicts previous forecasts that predicted a rise in rates.
  • It’s just one more reason why now could be a great time to buy a home.

Mortgage Rate Forecast for 2020

For much of 2019, we have witnessed a general drop in mortgage rates. They have declined, more or less steadily, since the beginning of the year. We’ve become desensitized to phrases like “historically low rates,” for the simple fact that we’ve heard them so often and for so long.

Given these trends, you might expect that mortgage rates would rise through the end of 2019 and into 2020. Where else can they go but up? In fact, previous forecasts have predicted that very thing.

Well, prepare to be surprised. A recent forecast from the economic and housing research team at Freddie Mac predicted that mortgage rates would be lower in 2020 (on average) than they are this year.

On August 28, 2019, Freddie Mac published an updated forecast for the U.S. housing market and the broader economy. In it, they predicted that the average rate for a 30-year fixed mortgage (the most popular type of loan among home buyers today) would decline as we move into 2020.

To quote that report:

“Thus, we have adjusted our quarterly forecast for the 30-year fixed-rate mortgage to remain around 3.6% through the second quarter of 2020. We project the annual average to be 3.9% in 2019, before sinking to 3.7% in 2020.”

‘Global Uncertainty’ Putting Downward Pressure on Rates

This is a reversal from previous forecasts that predicted rates would rise gradually through the latter part of 2019 and into 2020. The question is, why? What has happened within the U.S. economy to put this kind of downward pressure on mortgage rates?

According to the economists at Freddie Mac, it has a lot to do with global uncertainty.

They pointed out that, around the world, long-term government bond yields have plummeted. Mortgage rates tend to follow the up-and-down movements of these bond yields. In Denmark (one of the few countries outside the U.S. that has a 30-year mortgage loan), interest rates dropped as low as 0.5% in response to this downward pressure.

Returning to the Freddie Mac forecast:

“…the mortgage rate trend in Denmark provides an example of the enormous downward pressure on long-term interest rates around the world.”

Of course, this is a long-range outlook based on current economic trends. And those trends could change over time, resulting in an entirely different outlook for mortgage rates.

For instance, if the U.S. and China were to resolve their trade dispute, it would likely have a stabilizing effect on financial markets. This in turn could cause interest rates to turn north again.

But for now, leading experts are predicting that mortgage rates will be lower in 2020 than in 2019 (on average).

This is mostly good news for home buyers. But a sense of urgency might still be warranted. Home prices in most U.S. cities are expected to continue rising through the end of this year and into next. That means buyers could end up paying more for a home next year, if they postpone their purchases until then. Food for thought.

This Long-Range Chart Says It All

The chart below was published by Freddie Mac in late August 2019. It shows the average rate for a 30-year fixed mortgage loan over the past few years. It also shows their forecast through the rest of 2019 and into 2020.

Mortgage rate forecast for 2020
Source: Freddie Mac Primary Mortgage Market Survey (PMMS).

One of the things you’ll notice in this chart is that rates have dropped steadily since the start of 2019.

During the first week of this year, 30-year mortgage loans had an average rate of 4.51%. That’s based on Freddie Mac’s weekly survey of the mortgage industry, which has been tracking the market since the 1970s. As of the latest reading, during the first week of September, the average rate for a 30-year fixed home loan was down to 3.49%. So it has dropped more than one percent (to date) since the start of 2019.

You can also see their long-range forecast for mortgage rates, indicated by the dashed line in the chart. They expect this general downward trend to continue over the coming weeks.

Home Buyers Are Taking Advantage

Home buyers appear to be responding to these low rates. According to a September 4th report from the Mortgage Bankers Association (MBA), loan applications submitted by home buyers increased 1% last week over the week prior and were 5% higher than a year ago.

But the same global uncertainty that is pushing interest rates down could have a cooling effect on the housing market. According to Joel Kan, MBA’s Associate Vice President of Economic and Industry Forecasting:

“Consumers continue to act on these lower rates, but the volatility in the market is likely leading some borrowers to pause refinancing and buying decisions.”

Global unrest and trade tensions also make it harder to predict how the economy will behave over the coming months. Current forecasts predict that mortgage rates will drop between now and 2020. But a lot could happen in the meantime to disrupt those predictions.

Disclaimer: This report contains mortgage rate forecasts extending into 2020. Those outlooks were provided by third parties not associated with the Home Buying Institute. As a general rule, HBI makes no claims or assertions about future economic conditions.