The August jobs report from the Bureau of Labor Statistics fell short of expectations, leaving many to pull back on their predictions that the Federal Reserve will raise short-term interest rates in September. Many analysts and industry participants are saying December is more likely for a Fed rate hike if the economy shows sufficient improvement.
December would make it exactly one year since the Fed’s historic liftoff from near zero interest rates, where the rates had been for the past nine years.
Meanwhile, mortgage rates have hovered above their historic lows for the past few months and have been below four percent for the whole year (Freddie Mac reported the average 30-year FRM at 3.46 percent for the week ending September 1, only 15 basis points above the all-time low). What effect will a Fed rate hike have on the mortgage market?
According to one analyst, refinances are popular and are likely going to stay that way from the time up until the Fed raises rates and even for a time afterward.
“Right now, with the clients we're working with, the refi market is about as hot as it's ever been,” said Leo Loomie, vice president, client services at Digital Risk. “They're taking in more loans than they can handle. (When the Fed raises rates), we might see a short-term impact to the mortgage rates at that time, but prior to that, you're going to see, especially with the indications they're giving the market, you're going to see more people getting off the fence between now and then. So we predict the refi market is going to remain hot up until the time they raise rates. At the time they do increase rates, we are thinking that it's going to remain relatively hot from a refinance perspective based on how low rates are currently.”
Estimates vary as to how many borrowers are eligible to refinance, generally from seven to eight million. A rate hike by the Fed might prompt some of those borrowers eligible to refinance to take advantage of it.
“They're going to see there was just a rate hike and they're going to say, ‘Now I truly don't want to lose this opportunity,’” Loomie said. “They might be a little complacent now because rates have been so low. A rate hike might actually kickstart people who have been sitting on the fence to really dive in before the Fed raises the rates again.”
Loomie predicts that refis will eventually decline within six to 12 months after the Fed raises short-term interest rates, and at that point, he hopes the purchase market will pick up the slack.
“You're going to see it go from a 60-40 refi to a 50-50 and eventually to a 60-40 purchase ratio, depending on where rates end up,” Loomie said. “There are a lot of headwinds with purchase. The inventory right now is very constrained, home prices are up, and wages haven't matched the increase in home prices. So you have a market where purchases have a lot of headwinds, and refis have a lot less headwinds than purchases do. So we're hoping to see some of those market factors correct themselves over the next six to 12 months, as in wages going up, unemployment continuing to go down and remain strong, and then we see inventory picking up because we have a lot of builders picking up inventory and really hitting the market again. Hopefully the inventory and the market characteristics are there to match and increase in purchase. If we see that, I think you'll see purchases pick up the slack from refi when the rates go up.”